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Structuring your business and finding effective ways to incentivise your employees can still be a challenging process in 2025. One option for an incentivisation scheme is to implement a Phantom Share Scheme. If you are looking for a method to reward and retain your staff without having to give up actual equity, then this solution might be just what you need.
Keep reading to find out:
- What is a Phantom Share Scheme?
- When are they offered?
- What are the different types?
- How are they different from an Employee Share Scheme?
- How are they taxed?
- How are they implemented?
What Is A Phantom Share?
A Phantom Share Scheme is a form of incentive offered by an employer whereby employees receive “virtual” or ‘fake’ shares that mirror the value of the company’s actual shares. In this modern approach – which remains popular throughout 2025 – no real equity is transferred. Instead, the scheme rewards employees based on the performance of the company, allowing them to benefit financially when the company’s value increases or when dividends are paid.
The purpose of phantom shares is simple: if an employer wants to offer the attractive benefits of share ownership without diluting their own equity, a Phantom Share Scheme offers the ideal compromise. This innovative arrangement continues to evolve alongside digital advancements, ensuring that benefits are closely aligned with corporate performance while keeping the administrative side straightforward.
When Are Phantom Share Schemes Offered?
Phantom Share Schemes present an alternative way to reward employees without the complexities of transferring real shares. However, these schemes tend to be most suitable in particular scenarios.
Firstly, because the payout under a Phantom Share Scheme is typically made in cash – much like an annual bonus – it can require a considerable cash reserve. For instance, if your company experiences a significant increase in value or if many employees are enrolled in the scheme, you must be prepared to make substantial cash disbursements.
Secondly, due to the cash-heavy nature of the payout, these schemes are often offered to senior or top-performing employees in a competitive market. If your business faces stiff competition for talent and needs to secure top talent to drive success, a Phantom Share Scheme is an excellent option.
Thirdly, because Phantom Share Schemes do not involve real shares, they are generally cheaper and simpler to administer. This also means you avoid many of the legal and administrative hurdles that come with offering actual equity.
What Are The Different Types Of Phantom Share Schemes?
There are two primary types of Phantom Share Plans: the ‘Appreciation Only’ plan and the ‘Full Value’ plan. Both are linked to the company’s actual share performance, yet they differ in how the stock’s performance impacts the employee’s payout.
In recent years, regulatory updates and digital enhancements have made both types even more transparent and easier to administer, ensuring that both employers and employees enjoy a fair reward system in line with modern corporate governance.
Appreciation Plan
An Appreciation Plan is a more limited version of a Phantom Share Scheme. Under this arrangement, employees are allocated “virtual stock” that is tied to the actual shares of the company, but they only receive a cash payout when the stock increases in value beyond its predetermined base level. The payout is strictly based on the appreciation above this base price, which is usually established on the date the plan commences.
Full Value
As the name suggests, a Full Value Phantom Share Scheme compensates employees for the total value of the stock, including both its base value and any subsequent appreciation during the term of the scheme. Although this method generally involves higher costs, it can serve as a more robust incentive for employees, especially in dynamic industries where company performance is rapidly evolving.
Phantom Share Schemes vs Employee Share Schemes
Employee Share Schemes have traditionally been one of the most widely used methods to incentivise employees. While there are many similarities between the two types of schemes, the core difference lies in the nature of ownership. Employee Share Schemes grant real shares and often confer voting rights, whereas a Phantom Share Scheme is purely contractual and does not involve any actual transfer of equity.
With an Employee Share Scheme, the legal and financial legwork is considerably more extensive, as the employer must establish the share value and decide whether employees gain shareholder rights. This can lead to higher administrative costs and legal complexities – a challenge that many businesses prefer to avoid with Phantom Share Schemes.
It is also important to note that the tax implications for these two schemes differ; we discuss the tax treatment of Phantom Share Schemes in the next section.
How Are Phantom Share Schemes Taxed?
In 2025, Phantom Share Schemes are taxed similarly to a cash bonus. The payout from the scheme forms part of the employee’s taxable income in the relevant pay cycle and is therefore subject to Income Tax and National Insurance contributions according to current HMRC guidelines.
Typically, the scheme is only taxed at the point of payment – whether that is made annually, in line with dividend distributions, or upon a triggering event such as the company being listed or acquired. Updated tax regulations mean that it is more important than ever to ensure your payout schedules are carefully planned to meet your cash flow and compliance requirements.
How Are Phantom Share Schemes Implemented?
Phantom Share Schemes are implemented through a contractual agreement between the employer and the employee. One of the key benefits of this system is its simplicity – there is no need for third-party involvement, and it can be introduced at the time of hiring or as a standalone update to an existing employment contract.
Modern digital systems have further simplified this process in 2025. With the widespread use of e-signatures (read more about why you should use e-signatures) and secure online contract management, drafting and administering these agreements has become faster and far more efficient. When preparing your Phantom Share Scheme, it is essential to ensure that the contract is robust; for further insights, see our article on what makes a contract legally binding. Moreover, having well-set-out business terms and conditions can help avoid future disputes – an area covered in our guide to good business terms and conditions.
Emerging Trends in Phantom Share Schemes for 2025
As we progress through 2025, Phantom Share Schemes are evolving with advances in digital technology. Innovative performance tracking systems and dedicated online dashboards now allow employees to monitor their phantom share accruals in real time, enhancing transparency and engagement. This digital transformation not only streamlines administration but also helps ensure compliance with updated tax laws and corporate governance standards. Adopting these modern tools can considerably reduce administrative burdens while providing a clearer incentive structure for your team.
Still Unsure?
Structuring your business to properly incentivise and retain top talent can be a stressful and complex task. The legal experts at Sprintlaw have extensive experience in this area and can guide you through the entire process to ensure your Phantom Share Scheme – or any alternative incentive plan – is implemented both effectively and in full compliance with current regulations. Get in touch with us for an obligation-free chat. You can reach out to us at [email protected] or call us on +44(0)2034321860.
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