Charles Brecque

Charles Brecque


April 26, 2023

An Introduction to Employee Share Option Schemes in the UK

Read this article to find out how employee share ownership works, different types of schemes available and why you should implement such a scheme.

An Introduction to Employee Share Option Schemes in the UK

As the name suggests, employee share option schemes allow companies to grant employees the option to buy company shares at a later date. Executing an employee share option scheme offers benefits to both employer and employee. 

Additionally, share options serve as an incentive for employees to further contribute to the company’s growth, making it an attractive win-win situation for all parties involved.

Considering implementing an employee share option scheme but not sure how to go about it? Fret not, because in this article, we’ll explore the basics! You’ll learn about:

  • What employee share ownership is and how it works
  • Several popular types of employee share schemes
  • The key difference between shares and options
  • Reasons to execute an employee share option scheme
  • Possible disadvantages to employee share schemes.

Let’s dive right in!

What is Employee Share Ownership?

Employee share ownership is when a company either awards shares or grants options to buy shares to its employees. 

There are plenty of great reasons why you should consider implementing one (which we’ll explore in greater depth later), but in a nutshell, schemes like this attract top talent, motivate employees, and add plenty of value to your team and business overall.

Additionally, employees will often receive discounted rates and tax advantages on shares they get through an employee share scheme – providing greater tax efficiency for the business overall.

How Does it Work?

There are several scheme models out there, each with its own pros and cons and situations where they are appropriate. 

Generally speaking, however, companies can execute an employee share scheme to distribute shares to their employees. The specifics will vary depending on the share scheme chosen. 

Before taking the plunge, it’s important first to figure out what outcome you hope to achieve by implementing an employee share scheme. This will help you thoughtfully determine which one is best for your business overall.

Types of Employee Share Schemes

This section will give you a brief overview of some popular employee share schemes that other companies are implementing.

EMI – Enterprise Management Incentive

Enterprise Management Incentives (EMIs) allow a company to grant share options for up to £250,000 per employee in a three-year period. They’re available for companies with less than £30 million in assets and have fewer than 250 employees.

EMI share options granted at market value (or greater) are free of income tax and national insurance contribution. Otherwise, you’re required to pay for the difference between the amount you bought the share and the share’s market value.

A key advantage of the EMI share option is that it’s more tax-efficient for employees. As long as the shares are sold at least 24 months after granting, they’re only subject to a lowered capital gains tax of 10%.

EMI schemes are considered discretionary, as they don’t have to be offered to all employees.

LTIP – Long-Term Incentive Plan

A Long Term Incentive Plan provides incentives to employees over a longer period, often for a year or more. 

LTIPs often rely on restricted share units (RSUs), which are usually agreements for shares or share options to be rewarded according to a vesting schedule.

A vesting schedule will include certain criteria, such as performance or length of employment, which the employee needs to meet to become eligible. Once those criteria have been met, the employee will receive the shares.

What makes LTIP attractive is that it rewards employees who share their skills and talents with the company for a significantly long time. 

As long as the rewards themselves are valuable enough, employees will be motivated to grow with the company.

Growth Shares

Growth shares are shares that often have a low initial value but are expected to increase in value faster than average.

Upon award of a growth share, employees have limited economic rights to the company’s value. 

However, as may be implied from the name, the employees’ economic share will “grow” once the company breaches a certain value threshold.

The main advantage of growth shares is that they’re flexible. They can be used as low-tax incentives for certain employees or for a wider employee population. They fit within, alongside, or as a substitute for other employee share plans.

SIP – Share Incentive Plan

A Share Incentive Plan allows an employer to gift or sell shares to employees and is an excellent scheme for large companies as it must be offered to all employees rather than a select few.

Employees have multiple ways of getting SIPs. For one, a company can give employees up to £3,600 worth of free shares in a year. 

Employees also have the option of buying up to £1,800 worth of shares or 10% of their pre-tax salary in a year, whichever amount is lower. 

Buying partnership shares also entitles an employee to additional matching shares, where employers can give up to two free shares for each partnership share. 

Shares in this scheme need to be kept for up to five years in the plan to avoid paying income tax or national insurance contributions.

SAYE – Save As You Earn

In a Save As You Earn (SAYE) scheme, an employee can use savings to buy shares. Like SIPs, SAYE schemes must also be offered to all employees.

The savings contract will last for three or five years. During this period, the employee can save up to £500 every month with the scheme. 

Once the savings contract has ended, employees have the option of using their savings to buy shares for a fixed price that’s typically lower than the market value.

The defining facet of SAYE schemes is that the interest and bonus earned once the scheme has terminated are tax-free. 

Employees also won’t have to pay income tax or national insurance contributions despite buying the shares at a discounted rate (contrary to a scheme such as EMI, for instance).

Shares vs Options: What’s The Difference?

There’s a key difference between shares and share options (or simply, options). By definition, a share entitles the shareholder to a portion or ownership of the company. 

When a share is sold or gifted, such ownership is transferred to the employee immediately.

On the other hand, granting an option instead gives the choice (but not the obligation) to buy shares at a future, pre-approved price and date. When an option is granted, employees don’t get immediate shareholder rights until after they’ve bought shares.

Why Execute an Employee Share Option Scheme?

Enhanced Employee Retention, Motivation and Attraction

According to HMRC, employees who participated in tax-advantaged employee share schemes felt more invested in their company’s success. This came hand in hand with better motivation and a better sense of job security. 

Some employee share option schemes will take a while for participants to see returns. Nevertheless, employees are more likely to stay with a company during that time, improving their retention. 

Some schemes are even described as bonuses and can be used to attract new talent.

Statutory Tax Reliefs Available for Cost-Effective Long-Term Reward

Tax relief is available for qualifying shares, which must meet certain requirements related mainly to the shares’ type and the company to which the shares belong. 

There are also less strict requirements related to the employee’s income tax position and the nature of the employer’s business.

These statutory guarantees help make employee share schemes quite cost-effective as a long-term reward for employees.

Customizable Share Schemes Based on Business Objectives and Circumstances

With the number of different share scheme structures available to different companies, there’s always something that best suits a business’s objectives – whether it’s for a fast-growing startup, or a company entering a slower phase.

Even within one type of share scheme, a company’s specific offerings can be customised to what would best fit the exact circumstances of the company.

Potential to Reduce Employment Costs Through Share Rewards

Share rewards can take off some of the pressure of using cash to incentivise employees. Shares or options are commonly offered as an alternative to bonuses and raises, helping to reduce overall employment costs.

The earnings for employees through share rewards can be greater as well, especially with tax-advantaged schemes.

Offers Long-Term Benefits in the Form of Company Ownership

According to multiple studies gathered by the National Center for Employee Ownership, having shares in a company improves employee performance. 

These benefits will be seen over the long term as higher percentages of employees become owners. In the long run, employee ownership can even eventually help decrease wealth inequality

Are There Any Disadvantages to Employee Share Schemes?

Share price volatility and administration costs are the major disadvantages of employee share schemes. 

Since share prices are susceptible to both rising and falling, the size of the reward can’t be guaranteed. This level of risk can prove to be unattractive to some employees.

Additionally, employee share schemes can be more complex than other types of incentive schemes, which might necessitate employing experts just to adequately track and monitor them, leading to higher administration costs.

The Bottom Line

An employee share scheme allows companies to incentivise employees by offering shares at a discounted or tax-advantaged rate. 

Some types of employee share schemes directly award shares and some grant share options. Some are tax-advantaged while some non-tax-advantaged schemes are more flexible.

Because there are plenty of upsides to having an employee share scheme in place, companies stand to gain a lot from implementing them. Just be certain that the scheme you’re considering is the best fit for your company at the moment.

The opinions on this page are for general information purposes only and do not constitute legal advice on which you should rely.

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