That’s especially the case if you’re a knowledge based service company as the value you deliver to your clients/customers is in fact created by your workforce. So, how do you go about keeping staff turnover as low as possible? Read on to find out more about how to fund this by making use of an employee share scheme.
Consider the Stages Model diagram below (a concept originally developed by Shirlaws). As your business enters into growth by advancing beyond the "payback" and "euphoria" phase, so you'll likely experience new challenges associated with expansion. Feelings of "stress" and "frustration" could for example be brought about by corporate organisations trying to poach your best people.
These large competitors would likely offer wage levels you'd struggle to match and tempting, lucrative benefit packages. In that sense this represents the second brick wall in your business journey - how to keep hold of your best people?
There are however, a number of ways for you to reward and thus retain your staff. The obvious is to use financial based incentives in the form of remuneration. If the purse strings are too tight to be handing out inflation busting salary rises then there are non-financial options available to help motivate them, including perks and benefits.
Whilst either of these approaches might be successful, a combination of the two in the form of share schemes can be a great way to incentivise employees and motivate them to look towards the future by offering them part ownership or a future share holding in your company.
SIP’s were introduced as a way to encourage employees at all levels to gain shares in the company they’re employed by. Most recently, from 5 April 2016 onwards, under a SIP employees may be offered up to £3,600 of free shares with no income tax and National Insurance consequences.
We’ve detailed below the different types of SIP offered and the associated rules:
SAYE is a savings related scheme where employees can buy shares with their savings for a fixed price. The employee can save up to £500 a month under the scheme, and at the end of the contract (usually 3 to 5 years) use it to purchase a stake in the business. No income tax or National Insurance is payable if conditions are met, however capital gains might be payable.
CSOP is a discretionary scheme where you as the owner can select employees. They’re granted the option to purchase the company’s shares in the future at the price on the date of the grant.
As an example a company may grant 100 shares at £1 per share. In 5 years time the market value may be £5 and the employee will be able to pay £100 for shares now worth £500. No income tax or NI is payable if conditions are met, however capital gains may be applicable.
This is the most common tax efficient scheme used by growing companies although not all businesses will qualify for it. An EMI share scheme allows employers to provide shares option incentives that are tax advantageous to staff. Your employees are granted the option to purchase these shares and become shareholders in the business with conditions that will motivate and retain them for the long term.
A fixed price is set for the shares to be bought at and the employees then exercise their options either at a predetermined future date or, event. The theory is that their hard work will help increase the share price and they will benefit from the appreciation in the value of the business.
ESS allows companies to offer a new form of employment status to both new and existing employees linked to a tax efficient share scheme.
Under ESS, employees receive at least £2,000 worth of new shares in exchange for giving up some of their statutory employment rights. This might include the right to claim unfair dismissal (except under grounds of discrimination and health & safety), the right to redundancy pay and reduced rights to claim flexible working and training related leave.
The scheme was designed for fast-growing companies with more concessions available from 2015, and is very useful if you’re looking to incentivise staff in a tax efficient manner whilst reducing employment costs.
From a tax perspective, ESS is an attractive option because it’s exempt from income and capital gains taxes subject to an upper limit of £100,000 of capital gains.
The implementation of a share scheme can offer many benefits to a company if executed correctly. Empowering employees by offering them part of the company they are helping to build can be a great way to motivate the workforce. They also have the added benefit of various tax advantages when taking up these schemes.
Whilst the benefits are clear, it’s important to remember that such schemes are surrounded by regulation and specific tax laws meaning each have their own distinctive pros and cons. So be sure to seek professional advice before implementing anything. Otherwise you could give yourself a big tax and administrative headache as well as adverse effects on employees, whom your aim is to motivate rather than upset.
The content of this post is up to date and relevant as at 01/09/2016.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.