Employee share schemes have become increasingly popular as businesses explore new ways of recruiting, rewarding and retaining staff.

Share schemes can be pivotal in aligning employees’ interests with those of the company by incentivising them to remain with the business typically to either benefit from a sale of the company and/or making them part-owners and stakeholders in the business’s profitability.

They are also now increasingly being offered to a greater number of employees as part of a tax-efficient remuneration package.

Let’s explore the legal intricacies of setting up share schemes, which can significantly influence your approach and strategy.

Types of employee share schemes

Most common share initiatives operate as Tax-Advantaged Share Schemes (TASS). The Government supports these schemes due to their tax efficiency for both the company and the employees.

However, it should be noted that these schemes have different criteria to satisfy and are suitable for different types or size of company and so should be considered on a case-by-case basis. The costs and benefits vary for each.

Common TASS include:

• Company Share Option Plans (CSOPs): Allows companies to grant options (rights to acquire) over shares without the beneficiary incurring income tax or National Insurance on the gain.
• Save As You Earn (SAYE) Options Plans: Employees save a portion of their earnings with the option to buy shares, contributing monthly through an HM Revenue & Customs (HMRC) certified savings arrangement.
• Enterprise Management Incentives (EMIs): Employees are granted options to acquire shares in the future at today’s value, typically subject to pre-determined conditions being met. Suitable for independent companies with assets under £30 million and fewer than 250 employees, providing significant tax advantages if specific conditions are met.
• Share Incentive Plans (SIPs): Employees can acquire shares (rather than options) held in a trust.

Non-Tax-Advantaged Share Schemes (NTASS)

Alongside TASS, there are also schemes not recognised by HMRC for tax advantages, such as certain long-term incentive plans and deferred bonus schemes often used in listed companies. Typically, these are more flexible with fewer conditions to satisfy.

The increasingly popular Employee Benefit Trusts (EBTs), like SIPs but without tax benefits, fall under this category.

Key considerations when establishing a scheme

• Tax planning: Any company introducing a scheme should ensure that it takes appropriate tax and legal advice. There are often firm criteria that schemes need to satisfy to benefit from the available tax advantages, which if not correctly considered can be costly for the company and employees alike.
• Exit-only schemes: These schemes allow employees to become shareholders only if the company is sold (and therefore can share in the sale proceeds).
• Understanding shareholder rights: Granting shares means employees gain shareholder rights, including voting, capital and dividend rights. Companies must consider the extent of such rights to avoid unintended shifts in control. Updating articles of association and introducing a shareholder’s agreement is a common way to protect the company and also establish and retain control.

Managing risks and rights

There are several steps that can be taken to manage the potential risks of share schemes, including:

• Limiting voting rights: If employees’ shares exceed 25 per cent of the total, they could impact special resolutions. Limiting the issuance of shares with voting rights or setting a cap below 25 per cent can mitigate this risk.
• Restrictions on share transfers: Implementing restrictions on how shares can be transferred can protect the company’s interests and compliance with existing shareholders’ agreements.
• Financing shares: The method of financing new shares issued under a share scheme should be carefully planned to align with the company’s financial strategy and objectives.
• Departing employees: mechanisms should be introduced to ensure that departing employees do not retain their shares once they have left the company. Articles of association and shareholders’ agreements will typically include these protections.

Employee share schemes offer a useful method to boost employee engagement and performance by integrating their success with that of the company.

Whether considering tax-advantaged or non-tax-advantaged schemes, it is crucial to navigate the legal and tax impact of each scheme on employees, the business and other existing shareholders.

If you would like legal advice in relation to setting up an employee share scheme, please contact us.