Employment related securities: a guide to employee share schemes in the UK

Patrick Whatman

Published on October 19, 2023

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5min

Both public and private companies have used stock options and shares to complement (or supplement) employee salaries for decades. Particularly for young tech companies (with relatively young employees), the appeal of a future windfall is enough to attract and motivate new hires.

The quintessential tech dream is to join a company in its early days, quickly grow the business until it goes public (IPO), and reap the rewards. European companies likeKlarna and Revolut created dozens of millionaires each when they went public.

But employee share schemes aren’t just for unicorn startups. The regimes detailed below have the potential to suit a wide range of companies, from new and growing to established and profitable.

This article explores these schemes and their benefits, and explains the four tax-advantaged designs specifically allowed for by HMRC.

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What are employee share schemes?

Employee share schemes (ESS) let employees share ownership of the company they work for. They not only receive a salary, but also stand to benefit as the company’s valuation increases over time.

These plans can be made available to a select class of employees, to all staff, and even to directors, consultants, and other non-permanent team members.

The basic goal is to give your team added reasons to care about and work for the future of the business. The better their performance today, the greater their reward when they exercise their options.

ESS can also be tax efficient for employees in particular, and can help to free up cash in the short and medium term for companies.

Broadly speaking, ERS is just another term for employee share schemes. “Securities” is an alternative name for shares, and thus these are largely synonyms for the same umbrella concept.

Another common term is “employee stock ownership plan” (ESOP). While not used by HMRC, this term is very common around the world.

Types of share schemes

In this and other guides, you’ll find a range of acronyms and shorthand for specific concepts or schemes. Depending on the specific setup or share plan chosen by your company, there are different tax rules under HMRC.

  • Tax-advantaged: HMRC explicitly allows for four specific schemes (detailed below), each with its own clear tax advantages for employees.

  • Non-tax advantaged: There are also common unapproved schemes used by plenty of businesses. Unapproved schemes are still perfectly allowable, they just won’t have the same tax advantages for employees and businesses.

Here are the four most common employee share schemes in the UK.

Company share option plans (CSOPs)

These let companies grant stock options to employees and directors, without the £30 million limit for EMIs (see below). While that opens them up to a wider range of companies, they are in other ways more restrictive (in the eyes of HMRC).

CSOPs have a few extra rules to consider:

  • Stock options must be granted at market price to remain free from tax

  • The options must also be held (not exercised) for more than three years to maintain their tax advantage

  • Each employee can be granted up to £60,000 worth of share options

Because of their low limits, they’re considered a good option for larger companies wishing to issue small numbers of shares to a large number of employees.

Enterprise management incentives (EMI)

Enterprise management incentives are a share scheme under which employees pay no income tax or National Insurance contributions when they purchase stock. EMI schemes are particularly appealing for fast-growing companies.

To qualify for this share scheme, your business must:

  • Have £30 million or less in gross assets

  • Have 250 employees or fewer

  • Not operate in banking, farming, property development, provision of legal services, or ship building

Companies can grant up to £250,000 worth of stock over a three-year period. While not subject to income tax or NICs, employees may have to pay capital gains tax (CGT) at a reduced rate when they sell stock.

Share incentive plans (SIPs)

Share incentive plan schemes were first introduced in the UK in 2000. Because the amount awarded or purchased can grow over time, they’re seen as a smart way to recruit and retain talent.

Under an SIP, an employee’s share balance can grow in four ways:

  • Free shares: awarded by the company to the employee, up to the value of £3,600 per year

  • Partnership shares: purchased by the employee via payroll, using tax deductions (up to £1,800 in value per year)

  • Matching shares: when an employee purchases partnership shares, the company can match with up to double the amount of shares purchased

  • Dividend shares: dividends earned under an SIP can be reinvested, with no limit as to the amount

For employees, no income tax or insurance payments are owed as long as the options are held for five years. And no capital gains tax is owed if the employee keeps their options in the plan until they sell. These two factors make SIPs a promising tool for retention.

Save as you earn (SAYE)

This tax-advantaged scheme has two important facets:

  1. Employees are given options to buy stock in the future at a price determined at the time of the grant; and

  2. Employees pay up to £500/month into a savings scheme for either three to five years, with these savings likely to be used to exercise those stock options.

The money saved doesn’t have to be used to purchase stock - if the value has decreased over time they obviously will choose not to.

So why would employees choose a SAYE plan over other savings plans? Similar to the other schemes above, Save as you earn offers real tax advantages:

  • Employees pay no tax or NICs on the interest or bonuses offered under their SAYE contract

  • They also don’t pay tax on the difference in value between their option price and the market value at the time of exercise

Registering with HMRC

Even though the four variations above are approved schemes, you almost always need to register your company’s employee scheme with HMRC.

  • New EMI grants must be communicated to HMRC within 92 days

  • CSOPs, SIPs, and SAYEs must all be registered before 6 July of the relevant tax year

To register your plan or grant, first add “Employment related securities” to your HMRC Online Services profile. Then you can register each new scheme when necessary.

Benefits of employee share schemes

We’ve seen some of the tax benefits of these schemes for individual employees. They offer a way for staff to invest in the future of their own companies, and receive tax relief in the process.

But why would companies choose to make these ERS plans available to their teams?

Attract staff

In certain industries - startups and high-growth tech companies in particular - share option schemes are basically a given. Prospective employees are often willing to compromise with lower remuneration up front for a potential large return in the future.

Major success stories, first in Silicon Valley startups but also across Europe, have made this an attractive proposition. And some of the schemes described above (like SAYE) have also made share capital a recruitment tool in more traditional industries.

Retain key employees

The logic is fairly clear: if employees are personally invested in the future of the company, they’re more likely to stick around for longer. And the very nature of the approved schemes above increases this likelihood.

SAYE requires employees to pay into a savings fund for at least three years; SIPs require them to hold their options for five years; other Silicon Valley-style schemes have a vesting period or “cliff,” which typically require up to four years to see their true value.

In the coldest fiscal terms, employees need to stay with the business or pay income tax that they’d otherwise be exempt from. And companies may choose to reward their best performers with bonus shares.

And then there’s the softer side.

Increase team engagement

Companies always want new incentives to keep their teams performing, productive, and engaged. And again, if your teams own a piece of what they’re building, they’re more likely to think about the long term success of their work.

A shared sense of ownership is a much-desired cultural value in modern companies. It helps shift the common sentiment from “it’s us against the bosses” to “we’re all in this together.”

Optimize payroll costs

As stated above, some employees will gladly take lower salaries in exchange for stock options (or similar). They are betting that the future value of the shares will make their current lower remuneration worthwhile.

For the company, you’re able to free up cash flow in the short and medium term, in exchange for (slightly) less equity in the future. But if the overall valuation of that equity increases, it’s usually still worth it. You’re sharing pieces of a larger pie, in exchange for help in baking it.

Use cash as a tool for financial health

Whichever ESS plan you choose - approved and tax-advantaged or otherwise - depends on what you hope to achieve. In most cases, the starting point is employee recruitment, engagement, and retention.

More and more, employees want (and have come to expect) a direct stake in the businesses they’re building. And a good equity plan keeps them in your success invested for longer.

But ESS schemes also free up today’s cash, so you can deploy it where you need it most. The trick is to do this without creating an administrative nightmare and undue extra work for your finance team.

Spendesk doesn’t offer help with equity plans, but we do help you manage your cash better. Get smarter spend management today.

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