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The rise of employee share schemes: a key factor in retaining top talent

holding on to their best employees. As the world opens once again and opportunities abound, business owners have suffered the ‘Great Resignation’, whereby many professionals have taken the leap of faith to try something new in the post-pandemic era.

Whether an organisation is hit by a tsunami of resignations is largely influenced by its approach to addressing employee happiness and fostering a productive culture of which innovative professionals want to be a part. High levels of staff turnover do no business any favours – especially those looking to grow. Ambitious businesses also need to inspire their staff to be part of the growth journey.

Why many professionals look for the complete package instead of the pay packet

It’s not all about salary either. Yes, a competitive wage is what all experienced professionals crave, but there is so much more that business owners can do to keep top talent engaged and strapped in for the ride.

In the post-pandemic era, the way professionals want to work is changing. The multiple nationwide lockdowns were a case in point that productivity could be maintained – and in some cases even enhanced – by remote working. The ability to work from home and minimise commuting times and costs and enjoy a better work-life balance has also come to the fore.

black laptop computer on brown wooden table

In the coming years, it looks increasingly likely that employers will have to be prepared to bend to their key workers, with hybrid working and even fully remote positions fast becoming commonplace in suitable industries. Flexible working arrangements can certainly save employees money on their commute and reduce their carbon footprint. Some professionals may even value the ability to work from home some or all the time over a bigger wage.

For firms that may not have the bottom line to match their competitors’ high salaries, employee share schemes are one such solution to retaining top talent and keeping key staff motivated in a progressive manner.

Many start-up businesses commit to offering equity compensation to key staff through an options scheme. When it comes to options vs stocks, the reason start-ups will choose an option scheme over the direct issue and allocation of company shares is because they don’t have to give away immediate equity to employees. Instead, option schemes give staff the ability to convert their options into shares within a predetermined timeframe at a set ‘strike price’. The conversion of options into shares is known as ‘exercising’.

The ability to convert options into genuine shares is not always straightforward. Options can come with several conditions attached, which may never be met. From an employer’s point of view, it’s important to treat key staff with total respect and transparency when discussing an option scheme. The last thing you want is to mislead senior staff on the conditions of your option scheme and face a mutiny further down the line when those options cannot be exercised.

The tax implications of employee option schemes

There is a significant difference between the tax implications of “unapproved” option schemes and EMI option schemes. Unapproved options are beneficial for creating flexible schemes that don’t require approval from HMRC, while EMI option schemes are far more tax-efficient for both the company and employees. Both schemes have the benefit of no tax being paid when options are granted- tax is only paid later on when options are exercised.

For unnaproved option schemes, once company shares are issued and allocated when an employee exercises them, there is an instant tax charge owed by you and your employee. HM Revenue and Customs (HMRC) will demand that income tax and national insurance contributions (NICs) are paid on the difference between the pre-agreed strike price and the current market value of said shares. Your employee will also be liable for capital gains tax (CGT) upon the sale of the shares, unless it is within their tax-free CGT allowance, which is currently £12,300 per annum.

There is a way for businesses to ‘cap’ the difference between the strike price and the market value of the shares issued to key staff, however. This comes in the form of  the Enterprise Management Incentive (EMI). An EMI option scheme enables businesses to agree on a market value with HMRC at the same time the options are granted to employees. At the time the options are exercised, no income tax or NICs will be due so long as the shares are exercised at the market value initially set with HMRC or higher. Your business does not incur any tax this way and employees will only have to pay 10% entrepreneurs’ relief should they decide to sell their exercised shares.

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