Employee Incentive Schemes
Employee incentive schemes can help you retain key people by giving them a share in the success of your business. We help you structure rewards that reflect what you want to achieve.
Employee Incentive Schemes
There are many routes to reward and incentivise your employees, from salaries and bonuses to additional benefits. Share-based remuneration can be a powerful tool – by giving an employee a share of the growth of the business, this provides additional incentivisation whilst ensuring the employee’s aims are aligned with the owner of the business.
But an opportunity to own shares may appeal more to the business owner than to the employee being asked to pay for them. Before choosing a scheme, it is worth finding out what your employees want, whether they can afford to participate and when they could expect to receive a financial reward.
Choosing an employee incentive scheme
Employee incentive plans can help you retain key staff and reward their contribution to the business. The choice will depend on your plans for the company as well as the tax treatment and the needs of your employees.
For example, shares or share options may be attractive where a future sale could give employees a share of the proceeds. If you intend to keep running the business, a cash bonus linked to profits or growth in its value may be more useful to them.
Tax-efficient share schemes
There are several types of Share Scheme that offer advantages for tax and National Insurance Contributions (NICs) purposes, subject to qualifying conditions.
- Share Incentive Plans (SIPs) – Employees can receive free shares or buy shares through the plan. Shares kept in the plan for five years can normally be withdrawn without Income Tax or NICs.
- Savings Related Share Option Scheme (Save As You Earn or SAYE) – Employees save regularly for three or five years and can use those savings to buy shares at a price fixed at the outset, potentially at a discount.
- Company Share Option Plans (CSOPs) – The employer grants to an employee or director options to buy shares at a fixed price. No tax or National Insurance Contributions (NICs) will be chargeable on grant of the options, and exercise is normally free of Income Tax and NICs between three and ten years after grant, provided the conditions are met.
- Enterprise Management Incentives (EMI) – A share option plan aimed at qualifying trading companies. The employer grants options to an employee, to buy the employer’s shares within a specified period of time at an agreed price. Normally, no Income Tax or NICs arise on exercise if that price is at least the market value at grant and the qualifying conditions remain satisfied. Discounted options can be granted, but the discount may be taxable on exercise.
When buying shares does not suit your employees
These tax-advantaged schemes are not always the best option for incentivising employees, particularly where employees must fund the purchase of shares with no clear opportunity to sell them.
This may not be an issue if there is expected to be a disposal of the company to a third-party purchaser so that the employee can immediately ‘cash out’ their shares and not be left out of pocket.
However, if there is unlikely to be opportunity to sell the shares then the purchase funding required for a true share option scheme may not be suitable for or attractive to your employees.
In such cases, ‘phantom’ share schemes or similar incentive plans where an additional cash bonus is calculated based on share values, can still provide the incentivisation required without the need for any shares to be purchased.
These payments are generally taxed as employment income. Employees can benefit from growth in the business without becoming shareholders, while the existing owners retain ownership.
Advice on rewarding employees
Tax Innovations can help you to identify the incentive scheme that best suits the requirements of your business and your employees, and to structure and report the appropriate scheme to HMRC.
Employees should understand how their reward is calculated, when they can receive it and what happens if they leave. Discussing these points before putting a scheme in place can make the difference between an incentive they value and one they never take up.
Speak to us about who you want to reward and your plans for the business.
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