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Employee shares: Incentives can benefit everyone

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What’s the catch? That simple question is the often understandable response when someone feels they are being offered something that’s too good to be true.
So when an employee is offered a stake in the company they work for, they can often pass up the opportunity because they fear there may be strings attached.

But attitudes are changing and increasingly firms are giving staff the chance to become shareholders – an incentive which could have benefits for both employees and employers alike.

Stuart Watson, director of tax at Aberdeen-based accountancy firm Hall Morrice, says employment-related share schemes offer businesses the option to deliver equity to employees, helping them reward and retain key people, while enjoying potential tax benefits themselves.

Enterprise Management Incentives (EMI) – where employees can be granted options, giving them the right to buy shares worth up to £250,000 without paying income tax or national insurance – have been popular in the UK for more than a decade.

The fact that potential benefits are shared between employers and employees make EMI an attractive option for small and medium sized enterprises, who are eligible as long they meet certain criteria.

Stuart said: “Under an EMI scheme employee gains are normally taxed at 10% or less after they have taken up the options and disposed of their shares – rather than the 20% or 40% income tax rates on income payments.

“And companies generally don’t pay national insurance contributions on the shares and can benefit from a corporation tax deduction equal to any gain in value when the employee exercises the option. As long as certain conditions are met, EMI can be an effective way for businesses to incentivise staff and encourage key personnel to stay with the company and reap financial rewards by contributing to its success and growth.”

To qualify, staff must spend at least 25 hours a week working for the company or at least 75% of his or her total working time if hours are shorter and own no more than 30% of the ordinary share capital. Businesses can grant tax advantaged share options to any number of qualifying employees up to a total share value of £3million and must notify HMRC of an award of EMI options within 92 days of the grant to qualify for tax relief. The scheme can be operated on a discretionary basis and doesn’t have to be offered to all employees.

Another option is the Employee Shareholder status scheme which allows companies to offer shares worth at least £2,000. These are gifted to the employee and any value in excess of £2,000 is taxable as employment income on the employee. However, the shares are not subject to capital gains tax when sold up to a value of £50,000 at issue. As part of the agreement, the employee must enter into a contract agreeing to a number of reduced employment rights.

“An individual must, with the help of the appropriate advice, consider the potential gain in terms of the share value against the rights they are giving up,” adds Stuart.

“Like EMI, companies can offer the scheme to selected employees and can benefit from corporation tax deductions – which the government believes makes it particularly attractive to fast-growing businesses. There are a number of options to retain and incentivise staff, maintain continuity and aid growth.”

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