Following Rachel Reeves’ Budget announced increases to Employer’s National Insurance from 6 April 2025, many business owners have been considering the impact that this will have on profitability and cashflow. As such, now might be the right time to consider alternatives to cash pay rises and traditional benefits when looking at employee retention and incentivisation for the year ahead.
There are a broad range of share incentives that offer employees the opportunity to benefit from the increase in value of your business. These can help you to focus their attention on value generation and introduce an additional inducement to stay with your company.
The two main types of share schemes
Option schemes
A share option scheme involves granting a right to buy a certain number of shares in the company at a fixed price in the future. The options can be drafted such that the exercise of the option (the point where the option is exchanged for shares) is contingent on reaching certain targets designed to align with your aims for the business. When an employee exercises their options they then become a shareholder. In some option schemes the condition for exercise is the sale of the company, so that they will only be a shareholder momentarily.
An option scheme often offers a business the most protection as if an employee leaves while holding the option it will usually lapse automatically.
Share award/purchase schemes
These schemes give employees actual shares from the outset, either free or for a determined price. As the employees will have shares, it is important to draft leaver provisions carefully so that the position is clear if an employee were to leave.
An overview of various employee share option schemes
There are a variety of HMRC approved schemes which have preferential tax advantages. “Unapproved” schemes do not have the same tax breaks, but as a result they can be more flexible.
Hazlewoods are well placed to advise on which scheme is right for your business, taking into account the specific circumstances and legislative requirements, alongside your commercial aims for how much you would want the employees to benefit from. A couple of the more commonly used schemes are set out below.
Enterprise Management Incentives (EMI)
This is a HMRC approved scheme share option scheme that is often considered the “gold standard” of employee share schemes.
As long as the exercise price for the option is at least equal to the market value of the shares at the date of grant, any growth in value will be subject to capital gains tax rates for the employee when they sell the shares. This should represent a significant tax saving compared to a bonus of an equivalent amount subject to PAYE. The company can also claim a corporation tax deduction from its taxable profits for the value passing to the employee on the exercise of the EMI options.
As this scheme offers valuable tax benefits, it is subject to various eligibility requirements for both the company in question and the employee. Eligible companies need to have gross assets of no more than £30 million and fewer than 250 full-time equivalent employees and not be controlled by another company. Certain trades, such as residential care providers and legal firms are excluded from participation in the scheme.
Qualifying companies may provide tax-efficient options over shares worth up to £250,000 per employee subject to a £3 million overall limit .
Company Share Option Plan (CSOP)
This is a less valuable HMRC approved share option scheme, which as a result has less stringent qualifying criteria than EMI.
The option limits are smaller here with only £30,000 per employee, but there are no excluded trading activities and larger companies are also able to take part.
If the options are exercised between three and ten years after they are granted, there are tax advantages for the employee/director receiving options.
Growth shares
This is an “unapproved” scheme, where the employees acquire shares of a new class which participate only in growth in the value of the company after that date.
When they are issued the tax value of these shares is often significantly lower than the other ordinary shares in the company so they can be bought without triggering a significant tax liability. Any future growth in value is then charged to capital gains tax.
If you are considering implementing an employee share scheme it is always best to seek expert advice. Get in touch with one of the specialists below to talk through the next steps.
