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Some of the most successful and recognisable businesses in the UK operate employee share option schemes, including the likes of the John Lewis Partnership and Richer Sounds. This should come as no surprise, given the prevailing school of thought that one of the best ways for an employer to motivate and retain key staff members is to give them shares, or an option for shares, in their company. Make employees owners, the rationale goes, and they will think like owners.

Indeed, recent analysis of the UK’s largest 50 private companies operating employee share ownership schemes showed that year-on-year productivity for those companies grew at twice the rate of the UK economy’s productivity growth as a whole. However, as well as incentivising employees to increase performance levels, employee share schemes have also been shown to enhance companies’ abilities to attract talented individuals in the first place, and to retain them thereafter.

With this in mind, there’s never been a better time for companies to consider employee share option schemes. However, for those who are not familiar with employee share options it can be difficult to distinguish between the various schemes that are available. A brief summary of these schemes is set out below.

Enterprise Management Incentive (EMI) 

An EMI scheme is an HMRC approved, tax-efficient option plan which allows a company to grant up to £3 million worth of share options to employees, with each recipient employee eligible to receive options up to a market value of £250,000 in a three-year period.

A major advantage of EMI schemes is that no Income Tax or National Insurance Contributions (NICs) are charged on the grant of the options and, providing certain conditions are met, there will be no such charges at the point the options are exercised and the shares actually granted. In addition, the exercise of EMI option shares should fall within the 10% Business Asset Disposal Relief (previously, Entrepreneur’s Relief) tax band for the purposes of Capital Gains Tax.

From an employer point of view, there is also corporation tax relief on the difference between the market value of shares at exercise of the options, which can provide a significant boost to the business on an exit/sale.

Options granted under an EMI scheme must be in respect of ordinary, fully paid-up, non-redeemable shares and the company must meet various criteria in order to be eligible for EMI.

Under an EMI scheme, the grantor company will set certain conditions which must be achieved in order for an option holder to acquire their shares. These may relate to certain performance targets or length of service. Alternatively, a scheme can also be drafted so that options are only triggered on the sale of a company, or its business and assets.

Company Share Option Plan (CSOP)

CSOPs represent another HMRC-approved, tax-advantaged, discretionary share option scheme under which a company can grant options to employees or full-time directors. Unlike an EMI scheme, there are no limits on the size of a company or its number of employees, meaning CSOPs are often utilised by larger companies, as well as companies which do not carry out a ‘qualifying trade’ for the purposes of EMI.

Similarly to EMI schemes, CSOP options must be granted over ordinary shares which are fully paid-up and non-redeemable, while the issuing company must not be under the control of another company. In other words, it must be the parent company in a group, and cannot be a subsidiary company. As with EMI schemes, CSOP options can also be exercised without any income tax or NIC liability, provided certain conditions are met.

However, there are factors which can make CSOP options more restrictive than EMI. For example:

  • employees can only be granted up to £60,000 worth of options (though, until recently, this was capped at £30,000), at market value; and
  • any gains made by an option holder are only exempt from income tax if the options are first held for at least 3 years.

As with EMI schemes, the company granting the options can set certain performance targets which must be met, or trigger events which must take place, before an option holder can exercise their option.

Share Incentive Plan (SIP)

SIPs are flexible, tax-advantaged share plans under which employers award shares to employees. Unlike EMI and CSOP schemes, SIPs do not involve the grant of an option to acquire shares. Instead, shares are held on trust for employees in order to obtain certain tax advantages, and there are four different types of shares which can be made available to employees under an SIP plan:

  • Free shares – an employer can grant up to £3,600 worth of free shares in any tax year. The grant may be linked to certain performance targets or length of service.
  • Partnership shares – these can be bought by employees using their gross pay, thereby avoiding income tax or NIC liabilities. Up to £1,800 per tax year, or 10% of an employee’s salary (whichever is lower) can be used to acquire Partnership Shares under an SIP.
  • Matching shares – when an employee buys partnership shares, their employer may agree to ‘match’ them, by granting two free shares for every partnership share the employee purchases.
  • Dividend shares – if an employee receives dividends on any free, partnership or matching shares, their employer may allow them to use those dividends to purchase more shares under the SIP, which are known as dividend shares. The main benefit of Dividend shares is that you should not pay income tax if you keep them for at least three years.

Unlike EMI and CSOP plans, all employees must be invited to participate in an SIP, subject to certain qualifications the company can set around employees’ length of service at the time the plan is adopted.

Unapproved share option schemes

Companies that do not qualify for any of the share schemes set out above, or who consider them too restrictive, may consider implementing their own bespoke share option plans. These are often referred to as ‘unapproved share option plans’, as they are not HMRC approved and do not, therefore, derive the tax benefits that HMRC approved schemes such as EMI do.

Unlike CSOP and EMI plans, there are no statutory restrictions on the quantity or value of options granted to employees, nor any restrictions on the size of the company granting the options. That is not to say, however, that a company cannot choose to impose its own restrictions as part of an unapproved share option plan, such as on the percentage of share capital an employee can obtain through their options and who is eligible to participate.

How we can help 

Our Corporate team regularly assist businesses, both small and large, to prepare and implement share option schemes.

For help and guidance on creating  share option plan to suit your business, please contact us by telephone on 01244 310022 or email at to find out how we can help you.