Set up employee share schemes

Employee share ownership - for employers

Companies might set up an employee share scheme to:

• motivate employees to become more productive
• align employees' interests with those of shareholders
• recruit or retain key employees
• compensate for lower salaries and relieve pressure on cash flow
• remunerate employees in a tax-efficient way
• increase loyalty and reduce staff turnover
• raise working capital
• realise owners' investment

The disadvantages are:

• the effect on morale and retention if the share price falls - particularly for share option schemes
• administration costs - short-term costs of drawing up and getting a scheme approved, plus long-term costs of managing the scheme and keeping records
• dilution of share stock - as more shares are issued each share you own becomes a smaller percentage of the company
• risks of arousing unrealistic expectations among employees of the financial rewards
• potential dilution of share ownership - you may lose control of the business if you give up too many shares: you must retain 75 per cent of the voting shares if you want to avoid this and still be able to take all important company decisions
• if employees eventually wish to sell their shares in an unlisted company (one without shares on a public stock exchange), you may need to run an internal market for the shares, perhaps through setting up an employee benefit trust

Tax advantages for HM Revenue & Customs-approved schemes

Your business may be entitled to corporation tax relief on the cost of setting up a plan, as well as for the cost of providing free shares and matching shares . No employers' National Insurance is due on the shares/options if the specific conditions of each scheme are met.

Taxation of these schemes can become quite complicated, as can the process of getting HM Revenue & Customs approval, so consult a legal or specialist adviser.

For an explanation of the different types of schemes see the pages in this guide on  HM Revenue & Customs-approved schemes: CSOP and EMI  and  HM Revenue & Customs-approved schemes: SIP and Save As You Earn.

Subjects covered in this guide

• Introduction
• Defining share option and share award schemes
• Employe share ownership - for employers
• Employee share ownership - for employees
• Different schemes - an overview
• HM Revenue & Customs-approved schemes: CSOP and EMI
• HM Revenue & Customs-approved schemes: SIP and Save As You Earn
• Taxed employee share schemes - taxed, phantom and long-term incentive share plans
• Taxed employee share schemes - restricted, convertible and benefit trusts
• Choosing the best share scheme for your business
• Set up a share scheme
• Here's how I set up a successful employee share scheme

 

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