Typically, an organisation’s choice of employee share scheme will depend on the degree of employee share ownership that it wishes to introduce. One employer might want only key people to own shares, whereas another might prefer all employees to become part-owners of the business by introducing an all-employee share scheme.
Various factors could be relevant: strategic reasons such as securing ownership succession; rewarding employees, and if there are financial reasons, whether this means employees share in any growth in the organisation’s value, annual profits, or both; a tax-efficient way to reward employees; business reasons such as enhancing the loyalty of employees or establishing a common interest among employee-owners.
An employer that wishes to extend ownership to individual employee shareholders should be able to take advantage of one or more of the significant tax incentives that are available. These include the following arrangements: the enterprise management incentive (EMI) under which smaller organisations that satisfy certain conditions can grant to employees options to acquire shares on a discretionary basis. Provided that the price payable under the option for the shares is not less than the market value of the shares when the option is granted, there will be no income tax or national insurance (NI) on any increase in value of the shares. Any gains realised will be subject to capital gains tax (CGT), which can be at a rate as low as 10%.
The company share option plan (Csop) permits grants of options over shares valued at up to £30,000, which, broadly, can be exercised without paying income tax or NI.
The all-employee share incentive plan (Sip) under which income tax relief is available when employees buy shares in their organisation and/or when they are given free shares. Any gains realised will be free of CGT.
Stephen Chater is share plans director at Postlethwaite