Share option schemes can offer potential rewards to attract, retain and incentivise key employees within the business.
In the UK, a share scheme can give both your company and your employee’s major tax incentives, making it a highly cost-effective way of providing long term reward.
The aim of share option schemes is to provide the employee with an equity stake in the business in the future in exchange for commitment and hard work. The employee will be able to exercise at some point in the future and benefit from the growth in the value of the shares without having to lay out any cash at the outset.
There are several types of schemes available, each with their own set of rules and regulations. At KMP, we review client’s objectives and implement the scheme that is suitable.
The share schemes that are available are as follows:
Enterprise Management Incentives (EMI)
The EMI scheme is available to trading companies with gross assets of no more than £30 million. Employees can be offered options worth up to £120,000 by their employer and they are normally free of income tax and National Insurance at the date of grant and on exercise. When the shares are sold, the normal capital gains tax rules apply.
Save As You Earn Schemes (SAYE)
Employees are granted options at a discount of up to 20% at the start of the savings contract. They can save a fixed monthly amount of between £5 and £250 for three, five, or seven years. At the end of the savings contract a tax-free bonus is payable. Employees use the proceeds of the savings contract, including the bonus, if they want to exercise the option. If they do not, the proceeds are repaid in cash, tax-free. There is no tax or National Insurance charged on the discount or on the gain made when the option is exercised.
Company Share Option Plan (CSOP)
Employees are granted options to acquire shares at the market price at the time of grant. Employees may be granted options over shares worth up to £30,000 at any one time. There is no tax or National Insurance charged on the gain made when the option is exercised, provided that the options are held for at least 3 years. When the shares are sold, the normal capital gains tax rules apply.
When certain businesses are unable to qualify under the approved umbrella of share schemes, or if statutory limits have been exceeded, unapproved options can be put in place. There are usually no tax implications at the date of grant, however, employees will pay income tax and National Insurance when they choose to exercise. There are no statutory restrictions on the level of participation in an Unapproved Share Option Plan.
A Phantom Share Option Scheme is a means of providing employees with a cash bonus that is based on the performance of the company’s shares. The employee is granted an ‘option’ over a set number of ‘phantom’ shares and the value of a ‘phantom’ share is equivalent to that of an actual share at the date of grant. The option can be ‘exercised’ provided certain conditions are met. The employee will receive a cash payment based on the increase in value of the ‘phantom’ shares from the date the option was granted. The cash payment will be reduced as appropriate by PAYE income tax and, where applicable, an employee’s NICs.
The arrangement is simple and does not impact on existing shareholdings.