As inflation continues to race ahead of average pay increases and most employers would like to avoid any cost increases at all, it could be time to look afresh at Employee Share Plans. HR Advantage is pleased to announce that with our specialist remuneration partner MM&K we can now provide a full share planning and administration service. MM&K is a leading independent consultancy specialising in the planning, design, implementation, and administration of business-driven pay and reward strategies. You can see more about them at www.mm-k.com

Why set-up a share plan?

The most commonly cited reasons for setting up a share plan are the recruitment, retention and motivation of employees.  These are some of the core areas on which a sound HR strategy is built and is the reason so many companies offer equity to employees, particularly where the tax advantages conferred by HMRC are made use of. 

By linking share price returns with beneficial tax treatment for both employees and employers, an employee share plan can become a key tool in aligning the interests of shareholders and employees, particularly at the senior level.  This is especially relevant for unquoted companies within the SME sector who can make recruitment packages more attractive through the promise of potential upside equity returns.  Research also confirms that share plans are effective in delivering improved employee retention, greater outputs and less staff turnover.

For most employers within the SME sector the starting point is to offer employees an option to acquire shares, namely the opportunity to buy shares in the future at a price agreed today. 

What are the different types of share plans?

Often tied to individual and/or company performance, there are three types of employee share option plan which confer HMRC-approved tax advantages within the UK. 

• Enterprise Management Incentive Plan (“EMI”) - The most flexible and generous is the Enterprise Management Incentive Plan (“EMI”) which allows qualifying companies to grant up to £120,000 of shares under option with no minimum holding periods. 
• Company Share Option Plan (“CSOP”) - The Company Share Option Plan (“CSOP”) allows £30,000 of shares to be granted under option subject to a three year holding period. 
• Save-As-You Earn Plan (“SAYE”) - The Save-As-You Earn Plan (“SAYE”) allows employees to save up to £250 per month out of net earnings for a three or five year savings period, with the savings plus tax free bonus used to fund the exercise of share options whose initial exercise price can be set at a discount of up to 20% without tax penalty.

Common to each is the fact that gains are potentially exempt from income tax as well as employee and employer national insurance contributions (“NICs”) and are instead subject to capital gains tax (“CGT”) which are assessed after utilisation of an individual’s exempt annual allowance.  Significantly HMRC will agree share values so the lack of a quoted market need not be a drawback to privately owned companies.

Are there any alternatives?

The alternative to an option plan under the HMRC-approved framework is the award of actual shares under a Share Incentive Plan (“SIP”) whereby employees are awarded shares which are held for them in trust for a statutory holding period, typically five years.  The SIP allows gains to be enjoyed potentially free of not only income tax and NICs but CGT as well.  There is flexibility within the SIP to permit employees to buy up to £1,500 of shares from pre-tax salary each year and to have shares of up to £6,000 awarded for free.  In addition, employees can reinvest up to £1,500 worth of dividends into shares each tax year.

What if I want to structure my own share plan?

Companies are free to structure their own share plans outside the HMRC-approved arrangements and with varying degrees of complexity.  Either way, the rationale remains the same.

Advice for employers