Set up employee share schemes

Different schemes - an overview

Employee share schemes can involve giving free shares to employees, granting them options to buy shares at a specified price after a specified period of time, or allowing employees to buy shares , and sometimes matching these with free ones.

To tailor share option schemes to the needs and goals of your business, you can:

• Make the award of shares or grant of options dependent on reaching certain milestones, eg in sales.
• Structure the scheme so that employees become entitled to shares only if you sell or float the company.
• Limit the scheme to certain key employees , eg those with scarce managerial or technical skills.
• Require a certain number of years' service - but make sure you don't indirectly discriminate, eg if women tend to have shorter service in your business.
• Run a combination of schemes or provide more favourable terms for directors, eg an Enterprise Management Incentive  scheme for directors and a Share Incentive Plan for other staff. Consider the rules for tax-advantaged schemes before doing so.

HM Revenue & Customs-approved schemes have tax and National Insurance contribution advantages. Taxed (unapproved) schemes do not but they don't have to meet the qualifying conditions for approved schemes, meaning you have more flexibility of design.

While shares in publicly traded companies can be bought and sold easily, this isn't always the case in a private company, particularly if you have no plans to float or sell the business. If you want employees to realise the value of their shares, consider establishing and funding an employee benefit trust .

The trust can acquire shares for sale that aren't bought by anyone else and these can then be recycled - together perhaps with newly issued shares - to meet future demand from employees.

Give some thought to how employees can see the value of their shareholding if your company is not publicly quoted. Shares in a private company can be valued in conjunction with the Shares Valuation Division of HM Revenue & Customs.

Learn about the shares valuation service on the HM Revenue & Customs website .

Subjects covered in this guide

• Introduction
• Defining share option and share award schemes
• Employee 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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