Tax-efficient employee rewards through EMI share options

Tech start-ups looking to reward, retain and incentivise key people can use a targeted share option scheme to achieve their goals.

Share option schemes enable entrepreneurs to give employees the opportunity to buy shares in their business at a future date in a tax-efficient way. This can be attractive to start-up and early stage tech companies where cash is tight. Salaries can be supplemented by the wealth-generating potential of a share option scheme, enabling the company to attract high calibre people.

Share option schemes also support employee retention, because the right to buy the company’s shares can be set for a specific future date. If the employee leaves the company before that date, the options lapse.

Individuals also have an incentive to do their best for the company; the vesting of share options could be linked to specific performance conditions, while employees will also gain most benefit from share ownership if the company increases in value.

Enterprise Management Incentive (EMI) scheme

The EMI scheme is available to companies with up to 250 employees and gross assets of less than £30 million.

It can be used to incentivise a selected group of employees (as opposed to some schemes that have to be open to all employees). This makes it possible to reward key people with the most potential to grow the business.

Each employee in the scheme can be granted options up to a total market value of £250,000. The shares can be non-voting, so there is no loss of decision-making control.

Company advantages

The main advantages are operational – being able to attract, retain and motivate high quality personnel without incurring any additional salary costs. EMI schemes are highly flexible, and can be tailored to meet individual company needs and goals. The ability to stipulate when share options can be exercised gives the company’s directors control over the impact of the incentive scheme. For example, if desired, it is possible to establish that options can only be exercised on the sale or flotation of the business. 

From a tax perspective, the company may be able to benefit from a corporation tax deduction that crystallises when options are exercised.

Employee benefits

Under the EMI scheme, the cost to the employee of the shares when they vest is the same as the value of the shares when they were granted. Even if the company’s value (and the value of its shares) increases, employees will still be able to purchase their shares at the lower share price attributed to the shares when the options were granted.

The EMI scheme is attractive to participating employees from a tax perspective. No income tax or national insurance contributions (NICs) are due on the grant of the options. In addition, no income tax or NICs are incurred on the exercise of the options as long as the exercise price is set at the market value of the shares when the options were granted.

There will be a tax liability when employees sell their shares. However, it should be possible to achieve capital gains tax rate of 10% on the sale of EMI shares – which compares extremely well to the tax a cash bonus could attract (45% plus national insurance).

To find out more about the ways in which you can incentivise and rewards employees through share options schemes, please contact Nik Shah.

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