Businesses are increasingly using employee share schemes in order to incentivise their employees, align staff with the interests of the Company’s shareholders, retain talent and support the Company’s overall growth. 

These schemes can be categorised as tax-advantaged and non tax-advantaged schemes.

Tax-advantaged schemes

National statistics report that 16,330 companies operated tax-advantaged employee share schemes in the UK in tax year ending 2021 which demonstrates how popular these schemes are. There are four primary tax-advantaged employee share schemes, and the salient (but not exhaustive) details are:

Enterprise management incentives (“EMI”)  

Seen as the most tax-advantageous discretionary share option awards currently available.  There are various statutory requirements that must be met, which includes (amongst other requirements) a limit on the market value of shares acquired by an employee – currently £250,000, and a limit on the number of employees that the company can have at the time of grant – currently 250 full-time employees. EMI options carry beneficial tax treatment.  There should be no income tax/national insurance contributions (“NICs”) on the grant of options (so long as the exercise price of the option is not less than the market value of the shares at the date of grant). Any shares that are acquired by exercising an EMI option will be subject to capital gains tax (“CGT”) when they are subsequently sold (and business asset disposal relief may apply which could operate to reduce the effective rate of CGT to 10%).

Company share option plans (“CSOP”)

This is another type of discretionary share scheme.  Share options must be granted at market value (with a limit of up to £60,000 of options to each individual – a recent increase in the limit since April 2023). On exercise of the option, there should be no income tax liability if the options are held for at least three years.  On sale of the shares acquired following exercise, CGT may be payable on any gain. Typically, these are used by companies where EMI is not available, but there are more stringent rules governing CSOP that should be carefully assessed before granting options under this scheme.

Share incentive plans (“SIP”) 

SIPs allows employees to acquire shares in their employing company.  Shares are held in trust on behalf of employees (where they must be held for at least 5 years in order that they may benefit from the tax advantages). SIPs comprise different types of awards (including free shares – where all employees can be awarded up to £3,600 of shares each tax year which are not subject to income tax).  If shares are sold directly from the SIP, no CGT will arise. If shares are then withdrawn from the SIP and then sold, CGT may be payable on any gain (if any) from the value at the point they came out of the SIP.

Save as you earn (“SAYE”) 

Through SAYE, a company can give employees an option to acquire company shares (and employers can set the exercise price at a discount of up to 20% of the market value of the shares).  As part of the process, employees will need to enter into a specific savings arrangement and deposit no more than £500 per month (bonuses or accrued interest is tax-free). This requires the employees to save a certain amount per month for any period between 3 to 5 years.  Savings can then be withdrawn or used to exercise the option. Under SAYE, no income tax or NICs should be payable on the grant of option. CGT may be payable on disposal of shares acquired.  Subject to requirements, there will be no CGT liability if shares are transfer to a pension directly from the scheme when it ends, or an ISA. 

Non-tax-advantaged schemes

It is important to note that the tax-advantaged schemes detailed above are not available for all companies, for example where the number of employees in the business exceeds the statutory maximum available for a specific type of share option plan or if a specific employee does not qualify, for example they are not tax-resident in the UK.

Companies in this position can often seek to create a non-tax-advantaged scheme in order to incentivise their staff with share options.  These can range from unapproved share option schemes (essentially an option scheme but without the tax advantages) or perhaps phantom share options (which are essentially cash-based awards). A key benefit of adopting these types of plans is that the relevant company can exert greater flexibility on the structure, timing and any restrictions it wishes to impose on the scheme. The drawbacks, of course, are primarily that there are no real tax benefits for employees. 

Contact us

Moorcrofts regularly acts for companies and individuals across a broad range of industry sectors. With a wide array of clients, from PLCs and household names to sole traders and partnerships, Moorcrofts has the expertise to advise on all aspects of corporate law including the grant of share options. For more information about Moorcrofts corporate services, visit our corporate services page or contact a member of the corporate team.