Motivating your employees to be more productive and keeping retention rates stable is imperative for company growth, after all, they are your best ambassadors.
Recent research showed that 85% of workers surveyed felt more motivated to do their best when they had an incentive.
There are several ways of incentivising employees, one of which is through an efficient share plan where employees acquire shares in your company. Not only are these plans a great tax benefit for the business and employee, but they also offer a much more meaningful sense of participation, ownership, and involvement than salary and bonus.
Let's look at the options:
Growth Shares
Growth shares are a special class of share issued to employees that allow the employees to share in the growth in value of the company above a valuation that is set at the date of issue.
Employees that receive the growth shares do not have to pay income tax on exercise, only capital gains tax on sale.
The Benefits
- Growth shares are designed so that recipients only share in the capital growth of the business from the point that the shares were issued, meaning that the founders secure their growth up to that point.
- By using growth shares you can limit the risk of the recipient having to pay Income Tax on receipt of the shares
- Growth shares are designed so that recipients only share in the capital growth of the business from the point that the shares were issued
- Minimises dilution on existing shareholders
- You can set conditions for recipients, such as achieving milestones or staying with the company for an agreed period.
- Shares are issued immediately
- A great option for businesses that are not likely to sell in the short term
EMI Scheme
This is a good scheme for incentivising employees as there must be set conditions attached to the share options. Normally the condition is something to work to, for example, staying with the company for 4 years or to a desired turnover. The employee must reach these conditions before they exercise the shares.
The Benefits:
- There is no charge to the employee upon granting the shares
- The share value used to calculate income tax is the value of when they were granted, not exercised
- The employees do not hold the shares straight away
- Options are granted to employees to exercise shares in the future, upon satisfying specific conditions/hurdles.
Outright Share Award
This is giving employees actual shares rather than share options.
A free share award is the gift of shares to employees to recognise their contributions towards the company's performance. Free shares are offered as either a one-off award to employees or on a more regular basis, usually subject to good company performance.
The basic tax rule is that if the employee is given shares for free or pays less than the market value of the shares at the time of award a charge to income tax and sometimes national insurance will arise. The tax charge will be the difference between the market value and the price paid by the employee.
The Benefits
- Free shares can be offered as either a one-off award to employees or on a more regular basis
- The employee buys or is gifted shares at their market value, with tax calculated at the time shares are acquired or the options exercised
- There are no restrictions around who can benefit, how many shares they can acquire and under what terms
- You immediately give a proportion of the business away
Flowering Share Scheme
Flowering share plans are versatile, tax efficient schemes that can allow employees to acquire low value shares where Revenue approved plans are not required. They are a class of ordinary shares issued by a company, which entitle the holder to capital generated by the future growth of the business above its current value. To both reduce the initial cost of acquiring the shares and to create an incentive for the employee, the flowering shares will include a requirement that the company reaches an agreed level of future growth.
Using this scheme enables existing owners to effectively 'lock in' the current market price of the company as being attributable to solely themselves in any future sale of the business.
This would mean that employees would share in any proceeds over and above the current value of the company, in the event of a future company sale.
It would also enable employees to buy into the business with minimal tax implications, as the value of the shares with the restricted rights, would be substantially reduced.
The Benefits:
- Employees receive shares straight away to give them a feeling of ownership & ties them to the company
- Flowering shares can deliver business growth and retain key talent as shares only deliver value if the employees remain with the company and help it achieve its growth target
- Shares can potentially carry rights to dividends so employees could benefit from company performance.
- Shares should normally be available for purchase at a nominal or small amount, meaning only minimal outlay.
- No requirement for advanced HMRC approval.
- No restriction on who can benefit and by how much.
- Employees hold shares from day one.
What is the difference between approved and unapproved share options?
The main difference between the approved and unapproved schemes is that with an approved scheme there are no tax implications for the employee when the options are exercised – the tax charge is deferred until the shares are disposed of at which point the employee should have the cash to meet the tax liability.
If you have any questions or would like to discuss how you can roll this out, just let us know.