9 August, 2016

A beginners guide to employee share schemes – Part 2

A beginners guide to Employee Share Schemes

In Part 1 of our guide to Employee Share Schemes we explained what they are and the various types available. In this part we will be discussing the range of benefits and the things you need to consider before taking the decision to implement a scheme in your business.

What are the benefits of Employee Share Schemes?

Staff Management

The employee is given the opportunity to purchase a part of the company, which can bring with it significant financial benefits. The SAYE schemes have plenty of stories of employees who have made huge profits. The potential to financially benefit from the success of the company often delivers an increase in motivation levels. If an employee can see that they will benefit financially from an improved share price, they (should) be more motivated to improve the performance of the company. Companies can use share schemes to ensure employees are bought in to a common goal of increasing share performance so everyone within the business is pulling in the same direction.

Some companies will also use the presence of a share scheme as a company benefit when advertising for a role. If available, SIP, CSOP and EMI share schemes would provide an incredibly attractive benefit to potential new employees.

Schemes that require employment until maturity will also encourage employee retention, especially if there is a lucrative reward coming.


From the employee’s perspective, all the above mentioned schemes carry some form of income tax benefit.

All schemes are still subject to Capital Gains Tax when the employee comes to sell the shares. With some degree of tax planning, the effects of Capital Gains Tax can be reduced, by either using an ISA or the annual £11,100 Capital Gains Allowance. Sums that exceed this can be sold using a new year’s worth of share allowance, but the employee will be subject to market volatility in that period.

With Employee Shareholder Status (ESS), for Income Tax purposes, the employee is deemed to have paid £2,000 for the shares (even though they haven’t paid anything). Tax therefore is due on the value of the shares above this value as a benefit-in-kind. Capital Gains Tax is exempt on the first £50,000 of shares received, although schemes started from 17th March 2016 are now subject to a £100,000 lifetime CGT exemption limit. This has lessened the attractiveness of such schemes somewhat. Any advice provided cannot be charged to the employee, nor can it be a benefit-in-kind. Some cases may not be covered in PAYE and will therefore require a self-assessment.

For the company, employee share schemes can be a way of relieving cash flow pressures. Tax benefits for the company are a little trickier. Taxation of these schemes can become quite complicated, as can the process of getting HMRC approval, so be sure to contact a specialist for advice. The Sanders team can provide tax advice if you are considering a employee share schemes. Drop us a line at contactus@sandersgroup.co.uk to arrange an informal chat.

Are there drawbacks to employee share schemes?

• There are lots of legal hoops to jump through to set up an employee share scheme, particularly with HMRC, in order to obtain the tax benefits for the employees. This can unfortunately result in high legal and administrative costs.
• In terms of the effect on your workforce, motivation may be high if the share price provides a benefit to the employee, but this could have the opposite effect should it fall. If the move in share price was out of the employee’s control it may result in a feeling of ‘helplessness’ and provide a knock on company morale. Many employees may, in their minds, have already spent their share profit before it is earned and an unforeseen drop in share price could result in a very de-motivated work force and lead to resentment towards those higher up in the company.
• Once the employee owns the shares, they are subjected to usual market volatility. It is often ill-advised to have your whole share portfolio in one company, but those that are not stock-market-savvy will do – which could have many downsides and exposure later on.
• A large release of new shares will also dilute the current share ownership.
• With an ESS, due to waiving of rights, there are many legal hoops to jump through. There, could also be a significant impact on dilution of current share ownership due to there being no upper limit. Finally, it is also imporant to consider what will happen to the shares if the employee leaves the business.

Rules and regulations of employee share schemes

We could write for hours on the legal rules and regulations of employee share schemes but this is only an introductory guide. Below are some of the key points you should consider outside of what we have already discussed. Get in touch for a more in depth discussion on rules and regulations.


• Company must be listed and not under control of another company, unless that company is also listed.
• Scheme must be registered with HMRC.
• Similar terms must be offered to all employees.
• Cannot be linked to performance-based conditions.


• Company must be listed and not under control of another company, unless that company is also listed.
• Similar terms must be offered to all employees.
• Can be performance-linked


• Company must be listed and not under control of another company, unless that company is also listed.
• Scheme must be registered with HMRC.
• Can be linked to performance as long as the criteria is clear to the employee from the outset and objective.


Due to the significant tax advantages, EMIs have numerous rules surrounding them, mainly around the type of business that can offer them. The main points are covered above but here are a couple more things you should consider.

• A company can only grant a maximum market value of £3m through EMI.
• An EMI can be linked to performance.


• Due to waiving of rights, there are many of legal hoops to jump through. Evidence is is required at numerous stages of the process, such as proof that shares are worth more than £2k, and that the employee fully understands the implications of the scheme.
• May require shareholder approval.

What an SME needs to consider before establishing an employee share scheme

• Costs: Both administrative and the cost of the shares.
• A new share release on the current share ownership would dilute the value.
• Will staff be motivated by the scheme? (is it worth it!)
• Legal frameworks – particularly with EMI
• Are the communication channels within the company suitable for such a scheme? Employee share schemes require a large input from several functions of the business, e.g Finance, HR, Legal etc.
• How many shares to make available – if a high percentage of an SME was given on a share-save sheme to employees and they all sold to the same buyer, that person would have significant power in your company.
• Are there other alternatives to remunerate staff?

For more information about employee share schemes, get in touch by calling 020 7317 0040 or emailing us at contactus@sandersgroup.co.uk.

*The information provided in this blog post is for guidance only and does not constitute professional advice. Advice should be sought from a professional accountant if you are considering implementing an employee share scheme in your business.

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