Understanding Employee Share Schemes in the UK

Employee share schemes are an increasingly popular way for UK businesses to reward, retain talent and motivate their teams. By giving employees the opportunity to acquire shares in the company, schemes help to align individual performance with long-term business success. For overseas businesses expanding to the UK, they can also be a powerful tool to attract top talent in a competitive market.

This guide explains what employee share schemes are, the different types available in the UK, how they are taxed, and why many international businesses choose to work with a professional services provider like Goodwille to administer them correctly.

What are Employee Share Schemes?

An employee share scheme, sometimes called an employee share ownership plan (ESOP), allows staff to purchase or be granted shares in the company they work for. The purpose is to make employees feel like co-owners, sharing in the company’s growth, rather than simply working for a salary.

Share schemes can provide:

• A tax efficient way of rewarding employees
• Long-term incentives linked to future growth
• A method of retaining key employees in competitive industries
• Alignment between the interests of employees and shareholders

The Purpose of Employee Share Schemes

The main goal is to motivate employees by giving them a direct stake in the company’s success. For start ups and scale ups, employee share ownership can be a crucial way to attract talent when cash flow may not allow for high salaries. For established companies, it is a strategy to retain experienced staff and maintain competitiveness.

Beyond motivation, share schemes can also be used in succession planning, especially when business owners want to transition ownership through an employee ownership trust.

Are Employee Share Schemes Worth It?

The answer depends on the structure of the scheme and the circumstances of the company. The benefits can include:

• Tax relief for both employers and employees under HMRC approved schemes
• Lower income tax and National Insurance contributions when compared with cash bonuses
• The potential for capital gains tax treatment on the sale of shares, which may result in a lower tax rate than employment income
• A stronger sense of loyalty and engagement among staff

The downsides are mainly around complexity. There are legal requirements, HMRC registrations, and ongoing reporting obligations. Many companies therefore outsource implementation and compliance to governance specialists such as Goodwille and our partners.

What is an Employee Share Programme?

In the UK, there are several types of share schemes, some tax advantaged and some unapproved. A programme may involve giving employees ordinary shares, offering growth shares with value linked to future performance, or granting options to purchase shares at a fixed price in the future.

The ESOP Scheme in the UK

Internationally, ESOP often refers to Employee Stock Ownership Plans. In the UK, the closest equivalent is the Employee Ownership Trust (EOT). An EOT is a tax efficient model where a majority of the company is transferred into a trust for the benefit of employees. When structured correctly, there are significant tax reliefs for sellers and employees alike.

Tax Advantages of Share Schemes

Approved schemes bring important tax advantages:

• Reduced liability for income tax and National Insurance contributions
• Potential for capital gains tax rather than income tax when employees sell their shares
• Reliefs such as entrepreneur’s relief (now known as Business Asset Disposal Relief) may apply when conditions are met

Unapproved share options do not offer the same benefits, but can still be used as flexible incentives.

Different Types of Employee Share Schemes

There are four HMRC approved schemes in the UK, along with unapproved options. Each has different eligibility criteria and tax implications.

Share Incentive Plan (SIP)

Employees can acquire shares directly from the company. Contributions can be made from pre-tax salary, reducing income tax and National Insurance. Shares must usually be held in a trust for a set period to maintain tax relief.

Save As You Earn (SAYE)

Employees save monthly amounts into the scheme and after three or five years can use the savings to buy shares at a fixed price. The discount on purchase price and favourable tax treatment make it attractive, particularly in larger companies.

Company Share Option Plan (CSOP)

A CSOP allows selected employees to buy shares at a fixed price, often linked to the market value at the date of grant. There are restrictions on company size and eligibility. For many established companies, a CSOP is a simple, approved way to grant options.

Enterprise Management Incentives (EMI)

The EMI scheme is one of the most popular for start ups and smaller companies. It allows key employees to be granted options with favourable tax treatment, provided certain conditions are met. For example, the company must have gross assets under £30 million and fewer than 250 employees.

When EMI options are exercised, any increase in share value is generally taxed as capital gains rather than income. This makes it a highly tax efficient way of motivating employees.

Employee Ownership Trust (EOT)

An EOT involves transferring majority ownership of the company to a trust controlled on behalf of employees. It is often used as part of succession planning, giving employees long-term control and creating stability. Sellers may benefit from capital gains tax relief on the sale.

Growth Shares

Growth shares are designed so employees benefit from the future growth of a business. At the time of issue, they have minimal initial value, making them tax efficient. Employees only realise value when the company grows, is sold, or reaches an exit event.

Unapproved Share Options

Where companies do not qualify for tax advantaged schemes, unapproved share options can still be granted. Although subject to income tax and National Insurance, they are flexible and can be structured in many ways.

Tax Implications of Share Schemes

Tax treatment varies depending on the scheme. Key points include:

• Income tax and National Insurance may apply when options are exercised under unapproved plans
• Approved schemes often defer or reduce tax charges
• Gains realised on the sale of shares are typically subject to capital gains tax
• Some schemes qualify for entrepreneur’s relief, reducing capital gains tax to 10% subject to conditions

It is vital for employers to understand the tax implications and reporting obligations before implementing any plan.

The Role of HM Revenue & Customs

All employment related securities must be reported to HM Revenue & Customs. Approved schemes such as EMI or CSOP require registration, and annual returns must be submitted. Failing to comply risks penalties, loss of tax relief, and unhappy employees.

Professional assistance ensures these obligations are met correctly.

Why Overseas Businesses Use Share Schemes in the UK

For international companies expanding into the UK, share schemes can be an important part of attracting local talent. UK employees are familiar with these schemes and often see them as a mark of a competitive employer.

Goodwille supports overseas businesses by:

• Setting up the UK subsidiary or limited company structure required for schemes
• Advising on eligibility and suitability of different types of share plan
• Registering the scheme with HMRC and filing annual returns
• Ensuring compliance with UK tax law and corporate governance requirements

Benefits for Employers

Employers who offer share schemes can benefit from:

• Improved retention of key employees
• Greater motivation and alignment of interests
• A tax efficient alternative to cash bonuses
• A stronger reputation in the marketplace as a competitive employer

Benefits for Employees

Employees may benefit from:

• Paying less income tax and National Insurance contributions on rewards
• Acquiring shares at a fixed price with the potential for future growth
• Accessing capital gains tax treatment rather than income tax on sale
• Feeling invested in the company’s success

Common Considerations for Employers

When planning an employee share scheme, companies should consider:

• Which scheme is most suitable given company size and gross assets
• The number of employees to be included
• Whether the scheme is intended for all staff or only key employees
• How shares will be valued and allocated
• The potential costs, including professional fees and reporting obligations

Share Schemes for Start Ups vs Established Companies

Start ups often prefer EMI options due to flexibility and generous tax treatment. Established companies may use CSOPs or SIPs to include a wider range of staff. For larger companies, SAYE schemes are also common. Each scheme has its place depending on the stage of growth and structure of the business.

Exit Events and Employee Share Ownership

For many employees, the value of shares is realised at an exit event, such as the sale of the company or a public listing. Structuring the scheme correctly ensures that employees benefit at this stage without unexpected tax charges.

How Goodwille Can Help

At Goodwille, we have nearly 30 years of experience supporting overseas businesses as they scale into the UK. Our Governance team helps clients implement employee share schemes by:

• Support is establishing the right scheme for your business with our partners
• Registering the scheme and reporting to HMRC
• Supporting ongoing compliance and filings

Whether you are a start up granting EMI options to top talent, or an established company considering an employee ownership trust, we can guide you through every step.

 

Employee share schemes are a powerful way to motivate employees, retain talent and drive long-term growth. In the UK, there are a number of tax advantaged and unapproved schemes, each with its own benefits and obligations.

For overseas companies expanding into the UK, these schemes can also be an important part of building a competitive employment package. With expert advice and compliance support, they can be implemented smoothly and successfully.

To explore how an employee share scheme could work for your UK business, contact Goodwille’s Governance team today.

Meet our Head of Corporate Governance

Sarah Scott

Sarah is part of our Governance Team providing additional support and advice including regulatory compliance matters. A qualified lawyer with many years of experience working both in private practice and in-house, Sarah has a wealth of knowledge with  a full and balanced understanding of client needs. She is also our data protection specialist and is on hand to advise on client data protection obligations from assisting with registrations at the ICO to more complex data protection issues.