Employee Share Schemes for Employers

How to reward and retain staff.

Employee Share Schemes
In our article we list some tax-effective ways to offer incentive to staff.

(5-minute read)

We will cover:

  • Employee share schemes available in the UK
  • The best way to go forward with share incentivisation

What are employee share schemes?

Employee share schemes, otherwise known as share incentivisation, is a way to motivate employees. With these schemes, employers can reward their staff with shares in the company.

This is especially useful for SMEs such as owner-managed or family businesses, which benefit greatly from retaining high skilled employees. It ensures the long-term growth and success of your business.

Furthermore, employee share schemes are a tax-efficient way to reward your most qualified staff. Let’s look at the schemes available in the UK.


A few examples 

EMI – Enterprise Management Incentives

This is the most popular option to reward your employees, particularly in a SME or owner-managed sector.

You can grant your employees share options up to the value of £250,000 in a 3-year period, which doesn’t disrupt the cashflow of your business.

If you choose this option, you won’t have to pay Income Tax or National Insurance if you buy the shares for at least the market value they had when you were granted the option.

However, if you were given a discount on the market value, you’ll have to pay Income Tax or National Insurance on the difference between what you pay and what the shares were worth.

Companies that work in ‘excluded activities’ are not allowed to offer EMIs. Excluded activities include:

  • banking
  • farming
  • property development
  • provision of legal services
  • ship building

Employee shareholder shares (ESS)

As an employer, your employee can become a shareholder if they are to own at least £2,000 in shares.

These are exempt from Capital Gains Tax (CGT) upon sale on up to £100,000 of gain.

ESS are given up to employees in exchange for them giving up certain employment rights.

It can be a useful way of attracting and retaining talented staff in a start-up venture.

Growth shares

Also known as freezer shares, they seek to “freeze” the current value of the company.

To do this, companies change the rights of existing shares. Then, they create a new class of shares that reflect the current value of the business.

These can be given to employees at a relatively low market value compared to ordinary shares.

This share scheme can be particularly useful for companies operating in high-growth sectors such as technology which are not yet as large or established as higher-paying companies.

Their main advantage is that the value of the company is “locked” into the value of the shares.

They’re restricted to participation on an exit only basis, for example, on the sale of the company or an initial public offering.

Recipients of growth shares don’t have to pay income tax when they’re issued the shares, but capital gains tax may be due upon their sale.

Company Share Option Plan (CSOP)

This gives you the option to offer up to £30,000 worth of shares at a fixed price.

You will not pay Income Tax or National Insurance contributions on the difference between what you pay for the shares and what they’re worth.

Just like growth shares, Capital Gains Tax applies if you sell them.

Employees or full-time directors can benefit from this scheme and are exempt from National Insurance and Income Tax if they do not exercise their option for at least three years after the grant date.

Share Incentive Plan (SIP)

It allows companies to offer flexible terms to their employees.

With this scheme, all employees must be invited to participate.

There are several ways to offer employees SIP shares:

  • “Free shares” – Offering shares with a market value of up to £3,600 per tax year
  • “Partnership shares” – Purchase shares in the company using up to £1,800 of earnings per tax year
  • “Matching shares” – An appropriation of shares on the basis of up to two free shares for every one partnership share acquired out of gross salary.

If you get shares through this plan and keep them for 5 years, you will not pay Income Tax or National Insurance on their value.

Likewise, you will not pay Capital Gains Tax upon their sale if you keep them in the plan until you sell them.

Employee Ownership Trust (EOT)

It holds shares in a company on trust for the benefit of the employees, resulting in the employees having an indirect ownership in the company.

It’s run by its trustees, the employees, who in turn become more engaged with, and committed to the future of the company.

This scheme can be tax efficient as shares can be sold free of tax.

Also, when a company is owned by an EOT, it can pay annual bonuses to its employees free of income tax.


Before you do anything…

If you’d like to go forward with any of the above employee share schemes, make sure that you comply with the rules.

You should seek tax advice before implementing any of these schemes.

Also ensure that your company qualifies for the scheme you choose.

Then, send an application to HMRC. Once it’s approved, you have 90 days to grant the options.


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Kind regards Ilyas