Employee Incentivisation

A start-up is only as strong as its team and if you’re an entrepreneurial business, you’ll want to recruit and retain top talent. But, for the SMEs competing with the hefty salaries and company perks of the corporates, this is a big challenge.

There are a range of ways to incentivise your team – from cash benefits (like bonuses) to generous pensions, remote working and increased holidays – but a key way to lock people into your growth ambitions is to offer them the chance to own a piece of the business. It is therefore becoming increasingly common for employers to offer employees shares in the company, at some point in the journey. Share option packages help reward success and act as a tangible motivation for staff to feel invested in the future of the business. They can align the objectives of all of the stakeholders of the business (directors, investors and employees alike), can be highly tax efficient, and have been shown to increase employee productivity and business performance. 

An ever-popular option for many privately-owned firms who want to motivate and retain staff is to introduce an employee share incentive scheme. Recent research shows that companies with some element of employee ownership have a better level of employee engagement and are more resilient when times are tough. There is also evidence that such companies outperform their peers. 

You may not wish to give equity upfront, and indeed there can be some challenging tax consequences of doing so (as well as legal – leaver terms for example), but share options can be a fantastic tool. While terms like “you leave, you lose”, or “vesting”, “cliff” and so on, may sound intimidating, our team can help you navigate the jargon. 

Enterprise Management Incentives 

Perhaps one of the best known schemes currently available is the HMRC approved Enterprise Management Incentives (EMI) share option scheme. 

The EMI scheme gives employees the option to acquire shares at some point in the future, at a fixed price agreed with HMRC at the outset of the scheme. The options are exercisable on a future event such as an 'exit', or when certain conditions agreed in the option contract are satisfied. Key advantages of the scheme include the fact that no money is required to buy shares up front; any growth in value should be taxed at capital rates in the hands of the employee and may qualify for Business Asset Disposal Relief (formerly known as Entrepreneurs' Relief ) at 10%; and the grant of the option within a wider package can allow a company to attract and retain key talent.  

Other share schemes

Although EMI may be the most popular, there are other approved share schemes available including the Share Incentive Plan and Company Share Option Plan. There are also alternatives which are not HMRC approved, such as growth shares and unapproved options. Depending on your end goal, we can set out the options available and help design bespoke solutions. 

Our team of tax specialists have many years of experience introducing share schemes to companies and will guide you on the best option for your business. We advise across a number of areas including share scheme design, communication with employees around tax treatment, and managing option notification and annual reporting requirements with HMRC.  We also have significant experience in preparing and agreeing tax valuations with HMRC, and work closely with our legal intermediaries on share scheme implementations. 

At an exit stage, it is the very schemes above which can come under extensive diligence. We can support you in getting it right at the outset, ensuring those complex s431 elections are signed where needed and understood, and providing comments on queries where the answers have been dealt with at the time of implementation.