Attracting and retaining top employees can be challenging due to competitive job markets and a shortage of talent. Share option schemes can be a great way to combat this by rewarding employees for their part in the success of your business.
Ultimately, you can build a motivated and loyal workforce by aligning their interest with your company’s growth and creating a real sense of ownership.
Employee share schemes, also known as stock options, are programmes designed to give employees the opportunity to buy shares at a set price. Option schemes are designed to motivate and reward employees by aligning their interests with the company’s growth and profitability.
This blog post explores different share option schemes and their benefits for both you and your business. With clarity and understanding of the topic, you will be able to make an informed decision on which employee share scheme is best for your company.
What are share options?
Share options are an excellent scheme that can be set up by a company (usually a start-up) to provide employees with the option to purchase shares at a pre-agreed price at a later date.
There are several types of employee share schemes available:
- Non-Qualified Share Options
These schemes are open to all employees regardless of their position or length of service. However, they are not as tax-efficient as some of the other schemes that are available. - Enterprise management incentives (EMI scheme)
Aimed at SMEs, these schemes have several tax advantages that can benefit smaller companies. - Company Share Option Plan
These employee share option schemes are more flexible than an EMI scheme but do not have the same tax benefits. They are suitable for larger companies as well as SMEs. - Save as you earn scheme
This employee share scheme allows employees to save part of their salary tax-efficiently. These savings can then be used to purchase shares in the company at the end of a set period for a fixed price.
How do share options work for the company?
Giving employees an option to buy shares at the existing market value or a discount on the existing market value can motivate employees to be invested in the company’s success.
An increase in motivation can result in better productivity and positive work culture, ultimately driving success and profitability for your company. The more successful the company is, the more the employee could potentially gain, reinforcing the cycle.
When a company decides to grant options to its employees, a specific procedure must be followed:
- Who is eligible
Firstly, it is important to identify the eligibility criteria for employees who can participate in the share scheme. This can be based on a number of factors, including their job role, length of service or performance-based criteria. - Setting the exercise price
Typically, the share price is set at the market value of the shares on the grant date (the date the options are offered to an employee) or at a predetermined discount. This is commonly known as the strike price. - Valuation of the business
As the share price on exercise is based on a company’s valuation, unquoted companies will need a formal valuation of the business. This is typically carried out by an independent valuer. - Legal contract and documentation
These are the terms and conditions of the scheme, which outline the vesting schedule, exercise period and any other relevant details. - Vesting and exercise
The vesting schedule is a timeline, or set of requirements, that determine when options can be granted or exercised and can either be based on time or performance. Once options are vested, employees can choose to exercise their options and purchase shares in the allocated time frame. - Exiting the company
In most cases, if an employee leaves the company before the options are fully vested, the unvested and, in some instances, unexercised options may be forfeited depending on the type of scheme.
It’s important to keep in mind that different types of schemes have different tax implications. Spotlight Accounting is helping small businesses to large companies across the UK reach their full potential while staying compliant. Get in touch with us to find out how we can help you make your business more tax-efficient today.
How do share options work for employees?
An employee share scheme can provide your employees with the opportunity to be a part of the company’s ongoing success and be rewarded for their loyalty and contribution.
The process for how share option schemes work for an employee is relatively simple and should be set out in the legal documentation. Essentially, when an employee decides to exercise their options, they will then be ready to purchase their shares at the agreed-upon price set out in their option agreement.
If the market value of the shares is higher than the exercise price, an employee can choose to either hold onto the shares as a shareholder or sell them at market price to raise a profit.
Employee share scheme rules can vary, particularly during the period when options vest. So as a transparent company, you should encourage employees to take advice from an HR, legal and tax perspective to help them make informed decisions.
What are the benefits of share options?
Share options are a valuable tool for both employees and employers, and they offer exciting potential for growth.
Firstly, it gives employees a tangible opportunity to participate in and share the rewards of your company’s success, giving them a sense of recognition, which is essential for employee retention.
Secondly, for employers, the employee share option schemes can support your company in retaining key staff members and building an elite workforce by providing a competitive employee benefit. It’s a way of providing a route to company ownership without a significant amount of risk.
Tax implications to consider when looking to give share options
Tax should be one of the key considerations if you are looking to implement an employee share scheme for your business. Speaking to one of our tax experts can help you make a more informed decision and ultimately make better tax savings.
Income tax and national insurance contributions
Under certain employee share schemes such as the CSOP and unapproved schemes, employees could be required to pay income tax and national insurance on the difference between the market price of the share on exercise and the grant price.
Capital gains tax (CGT)
When employees sell shares that have been purchased through exercising share options, they may be liable to CGT on the difference between what the shares were sold for and the market value of the shares at the time of exercising their option.
Enterprise management incentive (EMI)
EMI schemes are tax advantageous for both the company and its employees.
Subject to meeting certain conditions and limits, employees do not have to pay income tax and national insurance on EMI options that are granted at market value.
Capital gains may also be taxed at a lower rate where specific qualifying conditions are met.
Are share options worth it?
Share options can be a valuable tool in rewarding an employee for their contribution to an increase in company value, as well as driving up the value of a business for existing shareholders. The scheme needs to align with your company’s strategic plan for it to work effectively and reach the business goals.
By being provided with a right to purchase company shares at a predetermined price at a later date, there is no upfront capital investment needed for your business. It is a risk-free way of funding company growth.
They are, however, complex and can be costly to put in place, which is why speaking to an experienced accountant can help you avoid unnecessary costs.
For tax and business advice, talk to Spotlight today
Are you a small to medium enterprise looking to grow your business and build an engaged and motivated workforce? Well, share options can be an excellent way to drive company growth and hold on to your top employees.
At Spotlight Accounting, our Spotlight on You service works with business owners to help them achieve a clear vision of their business with key goals and strategies to drive success. By identifying your key employees and creating a solid employee retention plan, we’ll help you attract the very best people to deliver on the business strategy.
Our experienced team of accountants are dedicated to helping our clients make their businesses more profitable. Contact us today to find out how we can help you!
