There are many types of employee share incentives. This article examines a few of them.
We all know employees are your company’s best assets. Employee share incentives give employees the chance to share in the success of your company and can therefore motivate the workforce to increase productivity. There is a growing expectation amongst senior staff that share schemes will be offered as part of the overall remuneration and these incentive arrangements are commonly on their “wish list”.
In some share schemes, employees are awarded or granted options over shares for free or at a price which is lower than their market value. Whilst this appears attractive for the employee on the surface, the award or option may have a number of tax implications, such as income tax and National Insurance contributions being due when the employee acquires the shares, calculated on the difference between the price paid for the shares and their actual market value.
As the shares are acquired in the course of employment at less than their market value, they are effectively treated as a benefit in kind and taxable as such.
The tax implications of a share option may be mitigated if the option qualifies for one of HMRC’s approved schemes.
The most popular approved scheme is known as Enterprise Management Incentives (EMI).
Share options will usually vest (i.e. become exercisable) upon either:
- Certain conditions being met e.g. the employee meeting a qualifying period of employment or achieving performance targets; or
- Certain events occurring e.g. the sale of the company to a third party.
In the first scenario, employees will become shareholders of the company and may be entitled to receive dividends and vote on shareholder decisions. The second scenario only allows the employee to share in the growth in value of the shares between the date of grant and the date of exercise as he/she will exercise the options and simultaneously sell the shares to a third party.
In 6 April 2013 the Government introduced a new type of employee status, the “employee shareholder”. In essence, the legislation creates a tax efficient framework within which employers can gift, tax-free, a minimum of £2,000 worth of shares to employees in return for giving up certain employment rights.
Although this scheme was initially met with some scepticism, it has proved to be quite popular and we have advised on a number of them.
Choosing the right scheme will be dependant upon many factors, such as the size of your business and the demographic of your workforce. If you are considering setting up an incentive scheme, please contact one of our Corporate lawyers.