Latest News

July 2014

No strings attached: how employee shares can be used to incentivise staff

What's the catch? That simple question is the often understandable response when someone feels they are being offered something that's too good to be true. So when an employee is offered a stake in the company they work for, they can often pass up the opportunity because they fear there may be strings attached.

But attitudes are changing and increasing numbers of firms are giving staff the chance to become shareholders - an incentive which could have a range of benefits for both employees and employers alike.

Employment-related share schemes offer businesses the option to deliver equity to employees, helping them reward and retain key people, while enjoying potential tax benefits themselves.

But as Bob Bain, partner at chartered accountancy firm Hall Morrice LLP points out, it is vital to give employees as much information as possible at the outset.

"It is unfortunate that many people are suspicious of schemes like this: employees are not obliged to take up the offer and some may be put off if they feel there is a hidden catch. But the fact is that share incentive schemes can be extremely beneficial for both the employer and the employee" he explains.

Enterprise Management Incentives (EMI) - where employees can be granted options, giving them the right to buy shares worth up to 250,000 without paying income tax or national insurance - have been popular in the UK for more than a decade.

The fact that potential benefits are shared between employers and employees make EMI an attractive option for small and medium sized enterprises,who are eligible as long they meet certain criteria including having a workforce of no more than 250 people and gross assets of less than 30 million.

Bob says, "Under an EMI scheme employee gains are normally taxed at 10% or less after they have taken up the options and disposed of their shares - rather than the 20% or 40% income tax rates on income payments.

"And companies generally don't pay national insurance contributions on the shares and can benefit from a corporation tax deduction equal to any gain in value when the employee exercises the option.

"As long as certain conditions are met, EMI can be an effective way for businesses to incentivise staff and encourage key personnel to stay with the company and reap financial rewards by contributing to its success and growth."

To qualify, staff must spend at least 25 hours a week working for the company or at least 75 per cent of his or her total working time if hours are shorter and own no more than 30% of the ordinary share capital.

Businesses can grant tax advantaged share options to any number of qualifying employees up to a total share value of 3 million and must notify HMRC of an award of EMI options within 92 days of the grant to qualify for tax relief. The scheme can be operated on a discretionary basis and doesn't have to be offered to all employees.

For their part, companies issuing the options must not be owned or controlled by any other company and must be trading mainly in the UK. Some types of businesses are excluded from EMI, including those whose main activities involve property development, some types of financial services and operating care homes.

Bob continues, "It is very important for businesses considering using EMI schemes to take the appropriate advice and ensure they are meeting the requirements as laid out by HMRC. It's also worth noting that tax advantage status can be lost if any of the conditions are broken or a disqualifying event occurs and option holders don't exercise those options within a certain timeframe."

While EMI remains popular among growing businesses, another option for employers came into force in September last year with the creation of the UK government's Employee Shareholder status scheme.

The initiative allows companies of any size to offer employees shares worth at least 2,000. The shares are gifted to the employee and any value in excess of 2,000 is taxable as employment income on the employee. However, the shares are not subject to capital gains tax when sold up to a value of 50,000 at issue.

However as part of the agreement, Employee Shareholders must enter into a special form of contract in which they agree to reduced employment rights such as:

  • No unfair dismissal rights - except on the grounds of discrimination or health and safety.
  • No right to statutory redundancy pay.
  • Reduced rights to request flexible working and time off for training.
  • Increased notice period of intention to return to work from maternity or adoption leave from eight to 16 weeks.

These rights are lost even after the shares are sold unless the parties agree to change the terms of the contract.

"Before deciding whether to become an Employee Shareholder the individual must, with the help of the appropriate advice, consider the potential gain in terms of the share value against the rights they are giving up," adds Bob.

"Like EMI, companies can choose to offer the scheme to selected employees only and can benefit from corporation tax deductions - which the government believes makes it particularly attractive to fast-growing businesses.

"There are a number of options available to companies looking to retain and incentivise staff to maintain continuity and aid growth. At Hall Morrice we help businesses decide what is the right scheme for them and then support them through the process."

Formed in 1976, Hall Morrice offers accountancy services across major sectors including oil and gas, construction, retail and service industries, with offices in both Aberdeen and Fraserburgh. Hall Morrice is based at 6 and 7 Queen's Terrace in Aberdeen and can be contacted on 01224 647394 or at

<< back to Latest News & Events

Hall Morrice Logo

Hall Morrice LLP
Chartered Accountants

6 & 7 Queens Terrace
Aberdeen AB10 1XL
tel +44 (0)1224 647394
fax +44 (0)1224 639541
© Hall Morrice 2011