How Employee Share Schemes Work

The employee share scheme is also referred to as the employee equity schemes or employee share purchase plans. Through this plan, directors and company employees can obtain shares in the company. Some companies opt to use this method to keep the employees engaged and promote culture growth within the company.

Therefore, it is no doubt that the employee share schemes help with the continued expansion of the business. However, before assigning the company shares to your employees, you need to ask yourself several questions, and these are:

• What is the size of your company in terms of asset value and team size?
• Does a performance milestone have to be reached before equity is released?
• Are you looking to give the company shares to non-employees, employees, or both?
• Do you want to offer the shares directly to your employees, or would prefer they buy later in the future?
• What happens when employees leave the company?

The employee share schemes are usually divided into non-tax advantaged and tax-advantaged schemes. For the tax-advantaged schemes, the shares don’t attract tax, whereas the non-tax advantaged methods are subject to taxation. In this article, you will be taken through how employee share schemes work by doing an in-depth review of the different types of tax-advantaged schemes. Once you understand this will help from Cake Equity, you will be better placed to know how employee share schemes work.

Save As You Earn (SAYE).

This is a savings-oriented share option plan that allows company employees to use their savings to buy company shares at a fixed price. It is a very common employee share scheme that enables the staff to save a maximum of £500 each month, which is the legal limit. Nonetheless, a company can choose to cap this rate at £100, for example.

The employees can buy the company shares after the saving contract ends, with this usually either after three or five years. With SAYE, you get to enjoy two benefits, and these are:

• Free bonuses and interests once the scheme elapses.
• You aren’t required to pay the income tax due to a price difference between what you paid initially and the current share worth.

Whereas SAYE is a tax-advantaged employee share scheme, you must pay Capital Gains Tax when after selling the shares.

Enterprise Management Incentive (EMI) Schemes.

The EMI employee shares scheme is an excellent choice for small startup firms with no more than 250 full-time employees. Each staff qualifies to buy shares that are worth £ 25,000 within a three-year duration. As a small business owner, this plan might be the right choice if:

• Your company meets the EMI eligibility requirements.
• You are looking to give equity to company staff and not external members.
• You wish to set certain conditions.

However, there are six conditions which should be met for a company to qualify for the EMI scheme, and these are:

• This option should only be available to an eligible employee.
• The employee should be qualifying firm.
• Such an option must be offered with the qualifying company because of employment.
• Only ordinary shares must be issued, paid in full not irredeemable.
• The maximum value of the option available to an employee should not surpass £250,000.
• The total amount of shares in the EMI scheme should not be more than £3 million.

If a company staff sells these shares, they may be eligible to pay Capital Gains Tax. Nevertheless, this doesn’t apply in all industries as there are some which are tax-exempt and these are:

• Farming
• Banking
• Providing Legal Services
• Property development
• Shipbuilding

Company Share Option Plan (CSOP).

Under this tax-advantaged scheme, employees are allowed to purchase shares with a value not exceeding £30,000 at a fixed price. For this employee share scheme to work, it needs to meet the strict conditions set by the National Insurance.

This plan remains active for 3 to 10 years after the date this plan becomes active. After ten years or when the employment contract ends, it usually gets terminated. However, this scheme can be exercised earlier in exceptional circumstances and these include:

• Takeover
• Injury or ill health
• Retirement
• Redundancy
• Death

One unique feature of this employee share scheme, unlike the other tax-advantaged schemes, is that it is discretionary in nature. What this means is that this plan allows the rewarding of a specific group of employees, for example, the senior managers. Furthermore, these rewards can then be customized to meet the needs of the employee and the company.

The employee is also not mandated to exercise an option if they deem it not beneficial. An instance of this happening is when the option price falls below the market price at the exercise time.

Conclusion.

If you were looking to understand how employee share schemes work, reading through this article would have provided you with invaluable insights. Therefore, you are now in a better position to know which employee share scheme best suits your business.

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