Scroll down for more information

Employee Share Schemes

Employee share schemes are an effective way for attracting, motivating, and retaining key employees. We’ll advise you on appropriate schemes, help set them up and ensure you and your employees are clear on the tax aspects. 

Contact Jill Walker

  • Jill Walker
    Meet the team

    The team

  • Small Businesses. Start-ups. SMEs. 

    Who we can help

  • Accounts & Tax Compliance. Business Tax Planning. Management Accounts. New Business Set-up. Outsourced Business Services. 

    How we can help

GUIDING YOU THROUGH THE CHOICES

Employee share schemes, which give equity to potential and existing key talent, can be very effective incentives. They need to be restricted to the people you value most (or perhaps could otherwise not afford) to avoid giving away too much equity away and diluting your shares. There’s a range of different schemes and the various tax treatments can be complex, hence the need for specialist advice before you make your decision. 

Share schemes can be used for employees or if you need to tempt consultants or advisors to collaborate on your projects. Not all schemes will be suitable for both these purposes or for your company; we can talk you through the differences. Schemes can award Ordinary shares straight away or as Options to be exercised later (at a significant event or at exit). Options have qualifying criteria, so we’ll need to check that your company can offer them. 

CONSIDERING THE TAX ASPECT

Ordinary Shares and Share Options have their pros and cons. Ordinary Shares are taxable when they are awarded, which can deter some people, but on the plus side they will have voting rights and be entitled to dividends. With Share Options, tax is not usually paid until the option is exercised. 

There are also Approved and Unapproved Schemes. Approved Schemes offer more tax advantages but both employers and employees must qualify; Unapproved Schemes are more flexible. 

Tax on shares and options through employee share schemes is advantageously low; one of the key reasons for their appeal. Capital Gains Tax (CGT) is paid when ordinary shares are awarded, when options are exercised, and on all shares when they are sold.  

All this may already be sounding complex, but don’t worry, we will make it all clear and suggest what’s best for you. 

THE EMI OPTION SCHEME

The most popular Share Option is the EMI (Enterprise Management Incentive) scheme. It’s only available to employees spending 75% of their working time for your company. Beyond that, however, it’s reasonably flexible with attractive tax rates and you can grant an employee up to £250,000 of options. 

THE EMI Option Scheme is intended for independent developing companies permanently established in the UK, with gross assets up to £30m and fewer than 250 employees. You must be substantially trading in a qualifying industry (here’s a list of the disqualifying industries). Employees will only pay income tax at exercise on the value of the shares when they were awarded, and the shares will be subject to a lower rate of CGT of just 10%. Subject to certain conditions, there’s also no tax or NIC cost for employers, and they can benefit from corporation tax relief on employees’ sales of shares. 

HMRC APPROVED SCHEMES

Approved all-employee schemes 

The HMRC approved share schemes are EMI (described above), CSOP, SIPs and SAYE (described below) 

Company Share Option Plans (CSOP) 

These tend to be used by larger organisations that don’t qualify for the EMI scheme. They are less attractive, as options are granted at market value, the employee must hold the shares for at least three years to avoid income tax on any gains and they are limited to £30,000 of options.  

Share Incentive Plan (SIPs) 

These include:  

  • Free Shares, where you can give employees up to £3,600 worth of free shares per tax year.  
  • Partnership Shares, which allow employees to buy an extra £1,800 of shares or the equivalent  of 10% of their gross salary (whichever is less) each year.
  • Matching Shares, where you can give up to two matching shares for each share the employee buys. 
  • Dividend shares, where employees can buy more shares using dividends from their Free, Partnership and Matching shares, if permitted by your scheme. 

Save As You Earn (SAYE) 

A scheme allowing employees to save up to £500 per month for three to five years, then on completing the plan they receive a tax-free bonus and can use the savings to buy shares at a fixed price. There’s no tax on the bonus or interest, and no Income Tax or NIC on any gains made on the shares. 

UNAPPROVED SCHEMES

Unapproved options are more flexible, as no HMRC approvals are involved in choosing qualifying employees or the value of shares they receive. You should be able to claim a deduction against corporation tax for an employee’s financial gain when they exercise their options. These schemes are less tax-efficient for employees than Approved options. 

Growth shares 

Designed to incentivise employees to help grow your company, but they only benefit if performance passes a pre-set threshold. If shares are acquired at market value employees should not pay income tax or NIC on them and 10% Entrepreneur’s Relief on CGT can be available on disposal. These count as a new class of shares, requiring changes to your Articles of Association. 

Joint Share Option Plans 

Benefits for the employee are similar to Growth shares, but the shares are held in an Employee Benefit Trust and split into Growth interest and Capital interest. Employees acquire growth interest at market value and the shares crystallise at a time specified in the plan. Tax efficient and low risk for employees, but can be complex and expensive to set up and administer. 

SHARE VALUATION

Whichever scheme you choose, it will be necessary to set a value on your shares. This is easy enough for listed companies, but as a private company it becomes more complex, with a variety of different methods available. 

One example is to compare your company with several listed companies of similar size, age, growth and market sector, taking an average of their figures across a range of key metrics. These will concern costs, capital, cash flow, earnings, debt to equity ratio and more. Expert interpretation of all these figures is essential, so we suggest you talk to us as soon as possible, to work out a share valuation.  

  • AAB encouraged us to submit an R&D tax relief claim. The team clearly understand the process to allow that to happen and were tremendous assistance in facilitating our submissions.

    Adrian Smith, Scotia Instrumentation Limited

  • We were delighted to have the support from our Corporate Finance partner AAB on the largest acquisition the Donaldson Group has completed to date. The collaborative support, drive and expert advice from AAB enabled us to complete the acquisition.

    Arlene Cairns, James Donaldson & Sons

  • The secondment support provided by AAB helped us streamline our accounting processes and enabled us to produce automated management reports from our accounting software. We have seen real benefits in the quality and timeliness of our information.

    Charlie Parker, John Lawrie Group

  • I contemplated transferring my business to a limited company and I knew I could rely on AAB to make the process as straightforward as possible whilst providing the accounts and tax advice to enable me to make the right decision.

    Colin Brown

#Updates See all updates

Sign up to updates

  1. Blog24th Mar 2022

    Spring Statement 2022 Updates

    ‘A new culture of enterprise’ was one of the headings in the Chancellor’s 2022 Spring Statement. It went on to say that improving productivity is the only way to deliver sustainable economic growth and increase living standards. The statement then... Read more

    View more
  2. Blog10th Dec 2021

    2022-23 Scottish Budget

    Kate Forbes delivered the Scottish Government’s Budget for the 2022-23 fiscal year on Thursday 9 December 2021. We outline the tax changes that individuals residing in Scotland should be aware of from a personal tax perspective.

    View more
  3. Blog2nd Nov 2021

    Scotland’s tech innovation hubs are more important than ever

    Since 2019 our lives, whether it be personal or work related, have completely transformed. The one constant across all of our changes has been our increased reliance on technology.

    View more
  4. Blog1st Nov 2021

    What opportunities are there for SMEs?

    There is no doubt that SMEs are facing a changing market. If you are an SME owner or manager, you will know that the past couple of years have been full of new challenges, and several new measures will have... Read more

    View more

See all updates

Our accreditations