Incentivising employees with share plans
Helen Fraser, Tax Adviser

Retention of motivated employees is important for any business. Often they will be the key drivers in the company growth and the best ambassadors for the company, boosting morale, productivity and reducing costs in the business.

There are a number of ways of incentivising employees in your business, one of which being share ownership or share options plans.  Let’s look at a few options below regarding shares in a limited company.

The main concept in offering shares to individuals is that they are receiving something of value in respect of their work they do for the company. As such, HMRC will look to tax them to the value of the shares they could receive.

Outright issue of new shares

Assuming none of the below schemes existed, the only way to avoid such a tax charge is for the individual to pay for the shares they acquire. If they have no personal funds, the easiest (but least tax efficient way) is to simply give the individual sufficient extra salary to cover this tax due.

Key points:

  • This gives a proportion of the business away immediately.
  • It can be the grant of options over shares or the immediate issue of shares. Essentially the employee buys or is gifted shares at their market value, with tax calculated at the time shares are acquired or the options exercised, not when the option (if an option is used) is given to the employee.
  • There are no restrictions around who can benefit, how many shares they can acquire and under what terms.


EMI Scheme

This scheme is useful for incentivising employees due to the fact there can be set conditions / hurdles attached to the share options, the employee has something to work towards, for example, continual employment for the next 3 years or the company meeting a specified turnover. The employee must then meet these criteria in order to exercise the shares.

Key points:

  • The benefit of this scheme is that there is no tax charge to the employee upon the granting of the share option, meaning tax will not be paid until the shares are exercised at the earliest.
  • The share value used to calculate income tax on the event that the shares are exercised is the value at the date of the options were granted, not the value when they exercise.
  • Options are granted to employees to exercise shares in the future, upon satisfying specific conditions / hurdles.
  • There is no tax to pay when the options are granted.
  • The employees do not hold shares straight away, so no shareholders for the company to deal with straight away.
  • HMRC advanced approval can be obtained for certainty around tax treatments.

Flowering/Freezer Share Scheme

Using this scheme enables existing owners to effectively ‘lock in’ the current market price of the company as being attributable to solely themselves in any future sale of the business.

This would mean that employees would share in any proceeds over and above the current value of the company, on the event of a future company sale.

It would also enable employees to buy in to the business with minimal tax implications, as the value of the shares with the restricted rights, would be substantially reduced.

Key points:

  • Employees receive shares straight away to give them a feeling of ownership & ties them to the company.
  • Shares can potentially carry rights to dividends so employees could benefit from company performance.
  • No requirement for advanced HMRC approval.
  • No restriction on who can benefit and by how much.
  • Employees hold shares from day one of the agreement, meaning shareholder rights to consider.

There are a number of other schemes (including Employee Share Ownership Trusts for example) but the above are the most popular with owner-managed businesses.

You can also listen to our latest 2 + 2 podcast, with expert advice from the Inspire team on all aspects of incentivising employees and share schemes.

Next steps

Hopefully that gives some guidance and clarification on incentivising employees with share schemes, but if you’d like to know more, please do get in touch and our specialist tax team will be happy to help you.

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