Establishing an employee share scheme is an excellent way of incentivising and motivating key members of staff which in turn can help improve the overall performance of the company. Awarding employee options does not require any initial cash outlay for the company, as a bonus or other taxable benefit would, making them a great alternative employee reward strategy. With the increase in NIC contributions and social care levy due to come in from April 2022, this is a more innovative way to increase value to employees that they can actually feel.
Rewarding key employees with a stake in the business can also encourage loyalty as in many situations employees are unable to keep the shares unless they remain with the company to the ultimate exit event, be that a sale or a management buy out.
The benefit of a share option scheme is that employees hold options rather than shares, with many option arrangements only crystallising when there is an exit event such as a trade sale. If the employee leaves the business before the exit event, then there option will fall away.
A share scheme approved by H M Revenue & Customs (‘HMRC’) can give both your employees and the company major tax incentives as well as being a cost effective way of providing employee incentives.
What is the Enterprise Management Incentive Scheme?
The Enterprise Management Incentives scheme (‘EMI’) is a tax-advantaged share option scheme that is available for qualifying businesses. It is particularly relevant for private companies as a highly tax efficient means of rewarding, incentivising and retaining qualifying key employees.
The main benefit of EMI is that, subject to certain conditions, employees may participate in share growth without incurring an income tax (‘IT’) or national insurance contributions (‘NIC’) liability and a potential advantageous capital gains tax (‘CGT’) rate on the eventual disposal of the shares.
There may also be generous corporation tax deductions available for the employer at the point the options are exercised.
Potential upcoming changes to EMI schemes
In HMRC’s CGT review published on 11 November 2020, it was recommended that the taxation of share schemes is reassessed, particularly for those employees with the financial flexibility to forgo salary in favour of other more lightly taxed forms of remuneration.
In the 2021 Spring Budget, it was announced that the government is seeking views on how the Enterprise Management Incentive scheme is operating. In particular, whether other forms of remuneration could provide similar benefits for retention and recruitment as EMI schemes.
Therefore if you wish to set up an EMI scheme we would advise to do so prior to any changes in the legislation, as any changes are unlikely to operate retrospectively.
We can provide technical tax advice to ensure that your EMI scheme is set up to align with your commercial goals whilst ensuring that your EMI scheme is in compliant with the relevant tax legislation.
Please contact our share specialist Kelly Garside for more information, or via our website here.
Disclaimer
The information was correct at time of publishing but may now be out of date.
