Businesses continue to look for ways to attract and retain staff as the war for talent continues. Share schemes, where key members of staff are rewarded with a stake in the business, are increasingly popular.
Here, Ed Tahsin, explains the benefits and restrictions of two common share schemes – Company Share Option Plans (CSOPs) and Enterprise Management Incentives (EMIs) – and what it means for employees.
EMI schemes are a popular and widely used tool to help growing businesses attract and keep top talent. EMI schemes provide employees with an option to acquire shares in the business at an agreed price which is ‘locked in’ for up to 10 years.
EMI schemes offer attractive tax advantages for employees by allowing them to participate in a share of the proceeds on an exit event such as a company sale. Provided that the EMI options are granted at market value then no income tax or NIC charges arise. Employees can also benefit from the future growth in the company being taxed at Capital Gains Tax rates at 20% or even as low as 10% so long as the options are held for at least 24 months.
There are, however, some restrictions on the types of businesses that can offer EMI schemes. Financial services, leasing, property development and farming businesses, amongst others, are all exceptions.
EMIs are open to all other businesses valued under £30 million and with less than 250 full time employees. Employees must work at least 25 hours a week to qualify and can receive up to £250,000 in share options.
EMI schemes can be a tax-efficient incentive scheme for employees to help businesses attract and retain key personnel, aligning employers and employees to work together towards a common goal.
CSOPs allow a business to grant shares to employees and directors in a tax-efficient way. Shares are granted at an ‘exercise price’ that cannot be less than market value on the date the option is granted.
Unlike EMIs, there is no limit on the company size or excluded trades, making it a popular choice with listed businesses, professional services firms and financial services firms.
CSOPs also offer attractive tax advantages with no National Insurance and income tax liabilities arising if certain criteria are met. This includes:
- An exercise of at least three years after the grant of shares.
- Exercise within six months of leaving an organisation.
- Exercise within 12 months of death by a spouse or family member.
- Exercise within six months of a cash takeover.
There is, however, one considerable drawback; the maximum value of shares an individual can hold via a CSOP is £60,000 (although this was only £30,000 prior to 6 April 2023). This limitation makes it attractive when a business wants to make relatively small awards to larger groups of individuals.
Questions all employees should ask
Whatever scheme a business adopts, employees need to understand the following key points:
- The exercise price – what is the price at which an employee can purchase shares? This will be set when the options are granted and often will be lower than the market price of the shares at the time the options are exercised. Employees will need to know their tax position before they exercise their options.
- Vesting periods & conditions – how long will an employee need to wait before they can exercise their option?
- Liquidity – how easy is it to convert shares into cash? Is there a market for the shares or will the employee have to wait for an exit event to occur, such as a sale of the company?
- Company performance – the value of those shares is linked to the performance of the company and the value of those shares may fluctuate.
Employees offered participation in any kind of share scheme should first take professional and independent advice.