Why companies use share schemes

Employee share schemes, also known as employee share plans or staff share schemes, are an essential tool for UK companies to attract, retain, and motivate employees. By enabling employees to acquire a stake in the business, share schemes foster a sense of ownership, align employee interests with those of the company, and drive long-term productivity and profitability.

Share schemes also provide significant tax advantages and can reduce employment costs by substituting regular salary increases with equity-based rewards. They are particularly useful for incentivising key employees or broadening ownership among all staff. The choice of scheme depends on a company’s goals, whether to create widespread employee ownership or to target specific individuals.

Types of share schemes in the UK

In the UK, employee share schemes fall into two main categories: tax-advantaged schemes and non-tax-advantaged schemes.

1. Tax-advantaged schemes

These schemes offer statutory tax reliefs for both employees and employers, making them highly attractive:

• Enterprise Management Incentives (EMI): A flexible and tax-efficient scheme designed for smaller, high-growth companies.
• Company Share Option Plan (CSOP): Open to most companies, allowing employees to acquire shares with tax advantages.
• Share Incentive Plan (SIP): Encourages broad employee ownership through direct purchase, free allocation, or matching contributions.
• Save As You Earn (SAYE): A simple savings-based scheme granting employees options to buy shares after saving regularly for 3-5 years.

2. Non-Tax-advantaged schemes

These schemes provide flexibility for companies that do not qualify for tax-advantaged plans or wish to structure bespoke arrangements:

• Unapproved Share Options: Share options granted without statutory tax relief.
• Growth Shares: Shares tied to the company’s future growth, rewarding employees when value thresholds are met.
• Long-Term Incentive Plans (LTIPs): Performance-based share plans commonly used for senior executives and consultants.

Enterprise Management Incentives (EMI): The UK’s most popular scheme

Why EMI is widely used

The EMI scheme is particularly appealing due to its:

• Tax Efficiency: Employees do not pay income tax or national insurance contributions (NICs) on the difference between the market value at the time of the exercise and the amount paid for the shares, provided the exercise price is at least equal to the market value at the time of grant.  This can result in substantial tax/NIC savings).
• Flexibility: EMI schemes can be tailored to specific business needs, including attaching performance conditions or vesting schedules.
• Recruitment and Retention Benefits: EMI options help attract and retain top talent, especially for high-growth businesses.

Eligibility criteria for EMI

To qualify, both the company and employees must meet specific conditions:

• Company requirements:
  • Gross assets must not exceed £30 million.
  • Fewer than 250 full-time employees.
  • Must carry out a “qualifying trade” (e.g., not property development or financial trading).
  • Must have a permanent UK establishment.
• Employee requirements:
  • Must work at least 25 hours per week or 75% of their total working time for the business.
  • Cannot hold more than a 30% stake in the company.

How EMI schemes work

1. Granting Options: Employees are granted the right to buy shares in the future, typically at their market value at the time of grant.
2. Exercising Options: Employees can exercise their options (purchase the shares) after a set vesting period. If the company’s value has grown, employees purchase shares at a discount compared to the current market value.
3. Tax Benefits: There is no Income Tax or National Insurance Contributions (NICs) on the grant or exercise of EMI options, provided certain conditions are met. Gains are taxed as CGT rather than Income Tax.

Benefits to companies

• Encourages employee commitment by tying rewards to company success.
• Corporation Tax relief on option gains.
• Flexibility to include performance-related conditions or retention incentives.

Recent updates to EMI

• From April 2023, companies no longer need to include details of share restrictions in option grant documents.
• The requirement for employees to sign working time declarations has been removed, simplifying administration.

Share schemes in the UK for US companies

Many US companies with global operations seek to extend their employee equity plans to UK employees. While US plans such as Employee Stock Purchase Plans (ESPPs) and Incentive Stock Options (ISOs) can be rolled out internationally, adapting to UK tax laws can provide significant benefits for both employers and employees.

Adapting US plans to the UK

• ESPPs vs. UK SAYE or SIP: While the UK does not have a direct equivalent to ESPPs, SAYE or SIP schemes can replicate similar benefits. SAYE aligns with longer purchase periods, while SIP works well for regular share purchases.
• ISOs vs. CSOP: The CSOP is a tax-efficient alternative for discretionary share options, mirroring the benefits of ISOs but requiring compliance with UK rules.

Key challenges for US companies

1. Administrative Burdens: 
   • SAYE plans require UK-based savings accounts.
   • SIP shares must be held in a UK-resident trust.

2. Double Taxation: 

1. • US citizens working in the UK face double taxation risks due to differing tax systems. Relief is often available under the UK-US tax treaty but requires careful planning.

Structuring cross-border incentives

To optimise incentives for UK employees of US companies, businesses can consider:

• Restricted Shares: Awards with low initial value can benefit from favorable UK and US tax rates on growth.
• Growth Shares: Future-value-based awards that align with UK capital gains and US long-term gains.
• Phantom Awards: Cash-based awards that mimic equity rewards without requiring actual share ownership, simplifying tax treatment.

By navigating the complexities of cross-border share schemes, US companies can align their global equity strategy while maximizing benefits for their UK employees.

Conclusion

Share schemes play a pivotal role in aligning employee and shareholder interests, driving engagement, and offering tax advantages. For UK businesses, the EMI scheme remains a standout choice for incentivizing growth, while SIP and SAYE provide broad-based options. US companies operating in the UK can leverage local schemes to enhance their global equity plans, ensuring compliance with UK rules while delivering meaningful rewards.