Kreston Reeves

Recruiting and retaining talent is a key issue for many businesses. The job market is buoyant, salary packages are increasingly competitive, and an SME may feel it’s not able to compete. You may have already reviewed your benefits package or bonus scheme, but have you considered a share option scheme for your key management team and those employees who you cannot be without?

This is particularly the case with the increase in NICs because of the social care levy announced recently (both for the Employer and Employee).

Younger generations aren’t always seeking a ‘big ticket’ salary but are instead looking at share ownership and incentives within the company they are working for. This is particularly true for start-ups and tech companies.

So, what is a share option scheme?
Share options are a way of rewarding key employees by providing them with the opportunity to purchase shares in the company, typically at a discounted price. Being a shareholder in the company, your key employees can benefit from any increase in the value of the company as it grows.

Share options are only available with a limited company; they cannot be implemented in a partnership or an LLP.

There are HMRC tax advantaged schemes, and an Enterprise Manage-ment Incentive (EMI) scheme is the most common scheme utilised by SMEs. Under EMI, a qualifying company can grant employees share options up to the value of £250,000 in a three year period. The employee will not suffer Income Tax or National Insurance if they buy the shares for at least the market value when they were granted the option. Any growth in share value from the date of grant of the option to sale of the shares should be subject to tax at (currently) a 10% rate (up to £1m of gain) and 20% beyond that.

At the grant of the options, the employee is not a shareholder but the employee holds a right to buy shares from the company at some date in the future. The event can be timed based, but more typically when certain performance criteria are set. The performance criteria can be linked to company performance or growth, remaining in employment for a set number of years or even just being employed when the company is sold. As advisors, we work with you to model a share scheme to meet your business needs.

If you decide to set up an employee share scheme, there could be a number of benefits for your business. However, there are also some potential risks that you should be aware of before making any decisions.

Benefits to employers of setting up an employee share scheme may include:

• Staff retention and ability to recruit new talent, also increasing staff loyalty and reducing employee turnover
Compensating for lower salaries by an alternative form of remuneration
Increased motivation and productivity by employees – they have an opportunity to own part of the company
Raising working capital
Aligning shareholder and employees’ interests.

Some potential risks of having such an employee share scheme include:
Share price volatility – the effect on morale and retention if the company value falls.
Administration costs – short-term costs of setting up a share scheme, plus ongoing costs of managing the scheme.
Dilution of share ownership – as more shares are issued each share you own becomes a smaller percentage of the company.
Financial expectations – employees may have unrealistic expectations of the financial rewards.
Ability to realising their investment – if the employee leaves employment can they realise their investment?
Business needs changing – so an employee who is key now, may not be in, say, five years.  This can cause schemes to need revision.

Kreston Reeves has a specialist share scheme team who can work with you to design and implement a share scheme that meets your strategic goals, ensuring that the scheme is as tax efficient as possible for both the company and the employee.


If you would like to discuss shaping the future of your business, get in touch with us on 0330 124 1399 or visit

Sam Jones, Corporate Tax Senior Manager at Kreston Reeves.

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