How effective are tax-advantaged share schemes?

Employee share schemes are often a good way to incentivise staff; by giving them a share in the future success of the company without making them actual shareholders. There are a variety of different schemes available and most offer tax advantages.

A new review is being commissioned by HMRC and the Government into the Save As You Earn (SAYE), Share Incentive Plan (SIP) and Company Share Option Plan (CSOP) schemes to review their effectiveness. In addition, the Government wants to know whether there are barriers preventing some companies from participating in these employee share schemes and whether the rules are easy enough to understand and flexible enough to be useful.

The Government’s analysis also seeks to understand how suitable the schemes are for lower income earners and whether there are other performance incentives being used by companies that may be comparable to the SAYE and SIP schemes, especially among less affluent taxpayers.

Generally the popularity of the SAYE and SIP schemes has stalled in recent years, whereas the EMI (Enterprise Management Incentive Scheme) has become more widely adopted. HMRC believes this may be due to low awareness of alternative schemes but that there may be other factors to be uncovered.

Why offer an employee share scheme?

Companies generally offer share options to their employees to create a feeling of company ownership and to enable employees to participate financially in the success of the company. A share option scheme can also be a valuable way to attract and retain skilled workers when good talent is in short supply. Employee share schemes are also proven to boost morale and engagement levels.

The different tax approved employee share schemes offer different advantages to employees; also with the benefit of different tax advantages. SAYE schemes are designed to encourage employees to save as a habit. The SIP scheme is designed to foster a more enterprising and productive relationship between an employer and their employees, by granting them tax-advantaged shares in the business.

One complication of SAYE and SIP schemes is that they should be made available to all employees, although rules can be introduced offering access according to length of service, level of remuneration or regular hours worked.

All employee share schemes ideally require the support of a tax adviser to set up and each requires certain administrative processes to be implemented and maintained together with company and employee rules.

Benefits of the Enterprise Management Incentive (EMI) share option scheme

The EMI scheme continues to be a very popular alternative to SAYE and SIP schemes. It is cost-effective, flexible, and there is a clear procedure to obtaining pre-approval from HMRC; it is possible to select specific employees for participation and the tax advantages outweigh those afforded to other schemes. Unlike the SAYE and SIP schemes, EMI enables employers to offer share options to selected employees, giving them the right to buy company shares in the future at today’s price. When the value of the shares increases, the employees can make a significant gain when the shares are sold, paying tax at the rate of just 10% tax in many cases.

Whilst the EMI has many advantages it is available only to UK based trading companies of a certain size, having gross assets of no more than £30m and up to 250 employees.

If you are interested in offering an employee share option scheme to motivate your employees, please contact us via partners@rjp.co.uk for an initial discussion.