Chris Thorpe looks at some under-utilised remuneration methods potentially available to companies, in particular the enterprise management incentives scheme.
A common scenario, particularly among smaller businesses, is where there’s a bright individual within the workforce: someone on whom the business has come to rely; someone whose presence really makes a difference. What’s stopping them from leaving? Hopefully, they have such a good boss the thought wouldn’t enter their head; but what if they’re so good there’s a strong chance that a competitor will want to poach them? How can you stop this from happening?
The obvious solution could be to pay them more money; but if the salary is increased, there will be more National Insurance contributions (NICs) to be paid by the employer, as well as more PAYE income tax and NICs for that key worker.
A stake in the business
Instead of just giving them the cash, giving that worker a stake in the business is the next stage. In a limited company, share ownership will give that person some genuine ownership, an extra incentive and a greater sense of belonging. Shares themselves could be the reward; income tax (and possibly NICs) will be charged on their value under the employment related securities rules, but the future dividends from those shares will attract a lesser tax burden than salary.
However, an employer might baulk at giving away a slice of their business absolutely; once that worker is ‘in’ the company, they are in, and it is hard to get them out. They might be an amazing employee, but when they become a fellow shareholder, things could change dramatically.
Share options
A potential solution, instead of giving away the family silver straight away, is to give the employee some options to purchase shares at some later date, potentially with some conditions attached. Not only would this give the company owners some reassurance, but it might give the worker that additional incentive to keep up the good work and not to leave.
There are two types of share option schemes: approved and unapproved. ‘Unapproved’ does not mean anything sinister or bad; it simply means that they do not attract HMRC’s ‘seal of approval’ with all the tax benefits.
Much like tax on the gift of share themselves, unapproved share schemes are taxed according to the market value of the shares at the time of exercise compared to how much is paid by the employee, with the difference being subject to income tax. Whilst they do not have the tax benefits, they are without all the criteria and so are more flexible.
Enterprise management incentives scheme
Amongst the most popular approved schemes with smaller businesses with key workers is the enterprise management incentives (EMI) scheme. These options can be tailored and subject to conditions, giving the employer reassurance and the employee an incentive.
The EMI scheme allows up to £250,000 of share options over a three-year window to be granted to an individual working 25+ hours a week (or 75% of their working time being with the company). The £250,000 limit includes options granted under the company share option plan (another approved scheme), and a maximum of £3 million of EMI options in one time is allowed. Provided the exercise price equals the shares’ market value at the date of grant (about which HMRC can give their agreement), there is no income tax or NICs to pay upon exercise of the option, irrespective of the shares’ actual value at the date of exercise. Once the shares have been purchased (n.b. the options must be exercised within 10 years) they can subsequently be sold, with the growth being chargeable to capital gains tax (CGT) instead of income tax. In addition, BADR can be claimed without having to meet the 5% and 24-month holding criteria for the shares. All that is required, as far as HMRC compliance is concerned, is to report the grant within 92 days.
Practical tip
Advance assurance and valuation agreements with HMRC would be wise, but what is critical is a watertight option agreement on which the grant and exercise will be based. The ability to tailor the option to suit employer and employee could be a ‘win-win’ for both parties.
