Employee Share Schemes: A Guide

Creating a culture of employee loyalty and engagement in the era of side hustles can be a difficult feat. 

One way to do this is to give employees ownership through an Employee Share Scheme (ESS).

ESSs directly issue employees shares, and ESOPs give employees the opportunity to acquire shares in their own company through a share option plan. 

ESSs are typically used to motivate and reward employees – and they’re extremely common, too!

So, if you’re looking to get your employees more invested in the business, a ESS may be the best strategy for you.

How Can An ESS Be Taxed? 

Employees are taxed on the value of the shares/options that they are issued. These are usually treated as income, and as such, they are effectively then subject to income tax. Unlike with wages (which is subject to PAYE), the employee is responsible for paying the tax.

However, tax advantages only apply to the following four types of share schemes:

1. Share Incentive Plans
2. Save As You Earn (SAYE)
3. Company Share Option Plans
4. Enterprise Management Incentive (EMIs)

Key Factors To Consider 

Employee Share Scheme 

What Is It? 

With an ESS, a company allows their employees to purchase the company’s shares, often at a discount from fair market value. The shares may vest in tranches over a period of time, or based on certain individual or company wide KPIs being met.

If the employee leaves, generally the rights to unvested shares automatically lapse and the company can purchase back the vested shares at either fair market value or a discounted rate depending on the circumstances in which the employee leaves.

How Do Employees Engage?

Typically, ESS arrangements are simple for employees to understand, as most people are familiar with shares as opposed to options to acquire shares. With an ESS, employee engagement is simple.

What Rights Do Employees Get?

If you want to access the scheme, then you need to issue ordinary shares – this allows the employee to have the same rights as other shareholders. They are then entitled to dividends and have the right to attend and vote at the company’s general meetings. 

Share Incentive Plans

Under this plan, employees do not need to pay Income Tax or National Insurance. They also will not need to pay Capital Gains Tax.

Save As You Earn (SAYE)

This plan is best used for the purpose of saving (hence, the name!).

The main benefits here are:

• Interest is tax-free
• You do not pay Income Tax or National Insurance

However, if you choose to sell the shares at a certain point, you may need to pay Capital Gains Tax.

Company Share Option Plan

Like the previous two ESSs, this plan does not require Income Tax or National Insurance contributions, but CGT may apply when you sell the shares.

Enterprise Management Incentives (EMI)

Like we mentioned before, an EMI is one of the more common ESSs. Why?

Again, you don’t need to pay Income Tax or National Insurance.

The main idea here is that an EMI gives employees the option to purchase shares at a fixed price, and at a certain date. This can be granted upon the satisfaction of certain requirements, such as targets.

One of the greatest benefits is that it is flexible, so you can make certain adjustments to the EMI so it works well for your business.

Talk to a Lawyer 

ESSs can be extremely valuable to your company – both for the employee and the employer. If you’re looking for a way to retain your talent and entice people to work for your startup, then this may be the right next step for your business.

However, there are many rules that need to be adhered to, so it’s best to have a chat with one of our lawyers. We’d love to help create a plan for your business that will be rewarding!  

Don’t hesitate to give us a call on 08081347754 or email us at [email protected] for a free, no-obligation chat about your share sale arrangement.

---