Share plans for SMEs - a tax-efficient remuneration strategy

The increase in employers’ national insurance contributions (NICs) from 13.8% to 15% from April 2025, together with the reduction in the secondary threshold from £9,100 to £5,000, sees SMEs facing significant increases in employment costs.

At the same time, they face a skills shortage in many critical areas, and finding ways to attract and retain the best talent without incurring too many extra payroll costs is becoming more important. Share plans can be a good option and offer a cost and tax efficient alternative to traditional salary and bonus arrangements.

Today, traditional remuneration packages that rely heavily on salary and cash bonuses attract a 15% employers’ NIC price tag above the lower tax threshold. The tax burden is also more costly for employees, with combined income tax and NIC rates reaching up to 47%. Nearly one half of a pay rise can vanish before the employee even sees any money.

This is a good reason why share plans can be so effective; they are cost efficient and can also be a powerful motivator for employees, allowing them to participate in the future success of the company.

Five key benefits of share plans as part of a remuneration strategy

Enhance employee loyalty and motivation by creating a sense of ownership;
Accelerate business growth through improved staff productivity and retention;
Reduce immediate payroll costs whilst offering valuable incentives;
Create tax efficiencies for both the company and participating employees;
Help attract and retain key talent in competitive markets.

Types of share plans for SMEs

There are a number of share plans to consider, each having different features and advantages. The four most beneficial schemes for SMEs are as follows:

Growth share schemes

Growth share schemes are non-tax advantaged but are popular in certain circumstances. They work by:

Creating a new class of shares with rights over future growth only;
Setting a predetermined valuation threshold that must be reached before the shares have value;
Allowing employees to acquire shares at an affordable price;
Rewarding employees only when the company’s value exceeds the set threshold.

The beauty of this approach is that existing shareholders only dilute the value of their shares if the company sees an increase in value over the current position. The initial acquisition of growth shares typically triggers only small income tax and NIC liabilities, provided employees acquire them at market value. Although growth share schemes are not tax advantaged like EMI schemes, when employees eventually sell their shares, the gains are typically subject to capital gains tax at up to 24%, rather than higher income tax rates.

Example: A marketing agency valued at £4 million creates growth shares that only participate in value above £5 million. The marketing director can purchase these shares at minimal cost since their current value is negligible. If the company later sells for £8 million, the director benefits from participation in the £3 million increase above the threshold, taxed at capital gains rates.

Enterprise Management Incentive (EMI) schemes

For qualifying smaller companies (gross assets below £30 million and fewer than 250 employees), EMI schemes provide the highest tax advantages:

Options to buy shares in the future can be granted at today’s market value;
No income tax or NICs arise on grant or exercise (if the scheme is correctly structured);
Business asset disposal relief (BADR) can apply from 2 years after the options are granted, rather than 2 years after the shares are acquired. In addition, the 5% minimum shareholding required for a BADR claim does not apply to shares acquired through an EMI. The availability of BADR reduces the rate of capital gains tax from 24% to 14% (until April 2026) or 18% (thereafter) up to a lifetime allowance of £1million of individual gains;
The exercise of options can be tied to specific performance conditions or milestones, these can include exercise only being undertaken immediately before a full company sale.

Example: A technology company grants its lead developer EMI options over shares worth £200,000 today, exercisable immediately before a full company sale providing specific product development milestones have been reached. Three years later, after achieving these goals, the developer exercises the options immediately before a company sale. The shares are sold for £350,000 which can be used to fund the exercise price of £200,000. No income tax is due on exercise, and CGT is due on the gain arising, with BADR being available.

Save As You Earn (SAYE) option schemes

SAYE schemes work particularly well for companies that want to offer all employees the chance to own shares. The conditions for these schemes are:

Must be offered to all eligible employees;
Employees save between £5 and £500 monthly from post-tax salary for a set period (usually 3 or 5 years);
At the end of the savings period, employees receive their savings plus a tax-free bonus or interest, if applicable;
Employees can use the savings to purchase company shares at a price fixed at the beginning of the scheme (usually with a discount of up to 20%);
If the share price falls below the option price, employees can opt to take the cash instead;
No income tax or NICs are payable on grant of the option or on purchase of shares;
Shares sold for an amount exceeding purchase price are charged to capital gains tax on the increase.

Company Share Option Plans (CSOPs)

CSOPs are aimed at full time employees and are generally used by more established companies:

The company grants options to employees to buy shares at a fixed price;
The exercise price must not be less than the market value at the date of grant;
Each employee can hold options worth up to £60,000 at the date of grant;
To qualify for a tax advantage, the options must be held for a minimum of 3 years before they can be exercised;
On exercise after the qualifying period, the employee can pay the exercise price with no income tax or NICs applying, even if the market value has increased;
On sale of the shares, capital gains tax applies to the sale price less the exercise price.

Example: A tech company implements a CSOP scheme to boost high level employee retention. A software development employee is granted CSOP options over 5,000 shares at an exercise price (which is their market value at grant) of £5 per share with a vesting period of 3 years. The market value at exercise is £12 per share which the developer pays and later sells the shares for £15 per share. No income tax or NICs apply on grant or on exercise because the options have been held for the minimum 3 year period. The employee pays £25,000 to acquire the shares and later sells them for £75,000. CGT applies to the increase above the exercise price paid, having a capital gain of £50,000 on which CGT is payable at 24%.

Considerations before implementing a share option scheme

There are many advantages to offering a share option scheme, but it is important to seek professional advice beforehand. Care must be taken to ensure it is properly implemented. This should include:

Company valuation professionally conducted to establish the appropriate share price;
Documentation for the plan must be legally robust and comply with company law;
HMRC reporting requirements must be strictly followed and if needed, advance clearance obtained;
The scheme should always be aligned with broader business objectives and succession planning considerations.

Corporation tax benefits of share schemes

One benefit of offering a share scheme is the ability to claim corporation tax relief on the costs of implementation.

Some share schemes attract corporation tax (CT) relief on set up costs, whilst some do not. The relief available can be summarised as follows:

Growth share scheme – as these are unapproved schemes the set up costs generally attract CT relief as a business expense;
EMI – set up costs attract CT relief ;
SAYE – set up costs do not attract CT relief. Only ongoing administration costs may be deductible;
CSOP – set up costs attract CT relief.

On exercise of the options, the company can claim corporation tax relief as follows:

Growth share scheme – CT relief available on the difference between market value at exercise and exercise price;
EMI – CT relief available on the difference between market value at exercise and exercise price;
SAYE – no relief available on exercise;
CSOP – CT relief available on the difference between market value at exercise and exercise price.

In summary, employment costs have increased significantly and share plans offer SMEs an efficient way to reward staff while managing costs and creating tax efficiencies. It is always advisable to seek professional advice before selecting a share scheme to ensure the scheme you implement is as tax efficient as possible.

If you would like to discuss introducing a share scheme in your company, contact us via partners@rjp.co.uk

Share plans for SMEs – a tax-efficient remuneration strategy