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Are you looking for a way to attract and retain talented people? A recent poll of 1,300 employers, conducted by the British Chambers of Commerce (BCC) in partnership with The Open University, found more than two-thirds (68 per cent) were experiencing a skills shortage.

This was not only affecting existing employees’ wellbeing but also negatively impacted output, profitability, and/or growth. One way to bring skilled workers on board and keep them for several years once they commit to working for your business is to offer a share scheme. 

In addition, because joining a share scheme means the employee has the option to purchase part of the company, they are personally invested in the organisation’s growth and prosperity. 

In this article, we explain what employee share schemes are and the different options available. It is important to have a solid understanding of the types of share schemes, so you can pick the right one for your business.

What are employee share schemes?

A company share scheme involves either granting your employees shares in your private company or the option to buy shares at a pre-set price in the future. Company share schemes can also provide tax advantages for both the employee and you, the employer.

What are the main types of employee share schemes?

There are five main types of tax-advantaged company employee share schemes:

1. Share Incentive Plans (SIPs) – the company invites select employees (normally senior managers and directors) to purchase shares which are held in a unique employee benefit trust (EBT).

2. Save As You Earn (SAYE) / Sharesave Scheme – allows employees to use their savings to buy fixed-price company shares at the end of a fixed period set by the employer.

3. Company Share Option Plan (CSOP) - a tax-advantaged, discretionary share option plan where a company can grant share options to any employee or full-time director. An employee must purchase shares at an exercise price that is not less than the market value of the shares on the date the option was granted.

4. Enterprise Management Incentives (EMIs) – targeted at small, higher-risk companies, EMIs options can be granted over the shares of any company (including one incorporated outside the UK), if certain conditions are met.

5. Growth Share Schemes – used in conjunction with or as an alternative to the EMI option. Growth share schemes are a special class of shares issued to employees that allow them to share in the growth of the company above a valuation hurdle. Growth shares are normally free from voting and dividend rights.

There are also many non-tax-advantaged employee share schemes, for example, performance share plans, deferred option plans, and phantom option plans. Non-tax advantaged share schemes are useful for small businesses who want to incentivise employees towards an end goal, for example selling or listing the company.


Free EMI Share Options Scheme Rules template


How do I set up an employee share option scheme?

Once you have decided on the type of share scheme that will best suit your company and its commercial ambitions, the following steps will need to happen to implement it:

a) Hold initial discussions with internal stakeholders such as HR and any advisors such as your solicitor and accountant

b) Present a proposal to the Board

c) Have the rules of the scheme drafted by your solicitor

d) Present the scheme for shareholder approval

e) Instruct your solicitor to check the company’s Articles and Shareholders’ Agreement and amend the documents if required

f) Send a proposal to HMRC for approval

g) Draft an employee communication plan

h) Set the share valuation and any option time periods

i) Invite eligible employees to join the scheme

Your company share scheme will now be up and running. However, this is not the end of the administrative and compliance duties and responsibilities.

What legal issues do employers need to consider when setting up a company share scheme?

Company share schemes do require ongoing administration and there are several legal and tax issues that our solicitors can advise you on to ensure your scheme is compliant as well as beneficial to your business.

  • As you are responsible for all PAYE and NIC payments, it is imperative that your company share scheme includes appropriate indemnities for tax and NICs. You will also need to provide provisions to recover tax and NICs from employees if required.
  • It is important to ensure that the share scheme you implement falls within one of the exemptions against the prohibitions contained within the Financial Services and Markets Act 2000. This relates to preventing unauthorised persons from carrying out regulated activities and making financial promotions.
  • You will need to comply with the UK GDPR provisions when collecting and processing personal data for the purposes of administering the scheme.
  • One of the most complex compliance areas involves corporate transactions as they relate to a particular share scheme. Your scheme will need to contain provisions stating what will happen if a particular type of corporate transaction such as an M&A deal takes place.

Get legal assistance from LawBite

Company share schemes are flexible, dynamic ways in which you can incentivise and motivate talented employees. Investing in experienced legal advice at the outset will ensure your scheme is both successful and legally compliant.

LawBite has helped thousands of business owners and SMEs achieve their commercial ambitions and regulatory compliance. To find out how we can support you in setting up a company share scheme, from drafting the rules to checking your articles - book a free 15 minute consultation or call us on 020 3808 8314.


Additional resources

In closing

Nothing in this article constitutes legal advice on which you should rely. The article is provided for general information purposes only. Professional legal advice should always be sought before taking any action relating to or relying on the content of this article. Our Platform Terms of Use apply to this article.

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