

The Chancellor recently confirmed that the number one objective of the Labour government is to deliver growth. Her first budget announced significant increases to employer’s national insurance contributions and an increase in capital gains tax (“CGT”).
This raises a question as to whether employee share plans are still an attractive method for companies to reward and retain employees.
Even simply from a tax perspective, the answer is a resounding “yes”. In addition, there are a number of other reasons why any ambitious business should implement them. There are few situations where everyone has something to gain and nothing to lose – and putting in place a share incentive scheme is one of them.
Share incentive benefits
- Employees are incentivised to achieve better performance
- Share incentives attract and retain staff, particularly in start-ups, where companies have insufficient cash funds to provide market-leading salaries
- These schemes enhance remuneration packages in a tax-efficient way
- Succession planning is enabled for major stakeholders
- Share incentives raise equity funding, particularly in management or employee buy-outs.
Share incentive schemes also have the added benefit of making the business more attractive to any buyer. Few buyers are interested in inheriting a dissatisfied management team who may feel aggrieved that they have worked hard on delivering the exit but do not see anything from it. We have seen many cases where a buyer tells a seller to leave some cash by way of a bonus for key employees upon exit, or the owner ends up having to pay more salaries to get a deal over the line.
Crucially, you can align the interests of employees with those of the company and its shareholders. This alignment leads to the optimum outcome – higher company valuations.
There are a number of options to consider when looking at the best form of an employee share scheme for your business. There are approved schemes which have distinct tax advantages over an unapproved scheme, but can be less flexible.
The key tax benefits:
- Employees can benefit from lower CGT; while it is rising, it remains much lower than income tax, and you can neatly side-step any employer and employee national insurance contributions. The government have said that the budget was the main fiscal event of the parliament and are hoping that there will be no major tax changes to come
- For companies, they can claim a corporation tax deduction for the costs of the scheme plus, when share options are exercised, a deduction equal to the gain that the employee makes
- If you implement an Enterprise Management Incentive scheme (“EMI”), any rewards will benefit from Business Asset Disposal Relief, which, whilst increasing over time to 18%, is significantly below the general CGT rate and well below the top-rate of income tax rates.
Share incentive scheme routes for businesses
EMI schemes: these are the most tax-efficient and well-known schemes. They can be structured so that if there isn’t an exit, the employees don’t become shareholders, but still lock in today’s value for a later exit at a much higher value.
Company Share Option Plans: these are approved plans, mainly for larger companies which do not qualify for the EMI scheme. These plans are reasonably flexible and incentivise key employees to deliver for the long-term.
Growth shares: Participants are rewarded for the growth achieved from today’s value. These are commonly used by private equity business owners, and make the team think about the long-term as they will receive a portion of the profits if the company does well. On the other hand, if the company does badly then the shares will effectively be worthless – or the owner can take the shares back.
Growth shares makes the team think how to collectively deliver a company which is more attractive to buyers. The tax paid is also within the lower CGT regime.
Overall, share incentive schemes are still an attractive route for businesses, even after the government’s first parliament – providing options for employee attraction and retention along with a suitable exit for employers.