Keeping ‘YOUR’ Options Open
Whilst job security will help with staff retention in the current economic climate, it is still important to reward and motivate your most important employees. A competitive salary, flexible working conditions and a substantial benefits package will help to retain your current staff and go some way to keeping them happy, but it may not provide the right inspiration that they need and you require from them.
Providing them with the opportunity to participate and share in the companies success will not just motivate and reward them, it will also allow you to reap the rewards of a growing profitable company and loyal staff.
An option, as the name suggests, is the opportunity for key employees to purchase a share or shares in a company at an agreed, pre-determined price, on the assumption that certain conditions are met.
The motivation lies in the hope that between the date the option is granted, and the date the option is allowed to be exercised, the value of the company will have increased, through the hard work of the employee, and the employee then reaps the rewards of this.
The tax treatment of the options depend on how they are structured and whether they are approved by HMRC, but can be very favourable for employees.
TYPES OF OPTIONS
ENTERPRISE MANAGEMENT INCENTIVES (EMI)
EMI options provide you with the greatest flexibility to reward your key employees with the most advantageous tax treatment.
Provided your company is a qualifying trading company, you are allowed to offer key management the option to purchase up to £250,000 of shares in the company for an agreed price. On the assumption that the company has increased in value, which is reflected in an increase in the price of the shares, upon exercise, the growth in these shares which the employee enjoys will be treated as capital growth, and as such subject to Capital Gains Tax (CGT).
The real tax advantage regarding these shares is that not only does the gain qualify for CGT (which is taxed at a lower rate than income), but that they qualify for Entrepreneurs Relief from the date the option is granted, thus reducing the tax liability further still provided the option has been in place for the qualifying period.
COMPANY SHARE OPTION SCHEME (CSOP)
A CSOP is broadly the same as an EMI Scheme, in that it is an HMRC approved scheme. Like EMI options, employees benefit from CGT treatment on the increase in value of the options they are granted as opposed to being subject to income tax under PAYE.
The scheme is run in the same way as an EMI Scheme, however as the scheme is to be available to reward all staff, the value of options that can be granted is limited to £30,000 per employee per annum. The ‘clock’ for Entrepreneurs Relief also does not start ticking until the share have been exercised and are owned by the employee, in contrast to the EMI options where the clock starts when the option is granted.
As the name suggests, an unapproved share scheme is one that is not ratified by HMRC and as such is not afforded the same beneficial tax treatment as the other two schemes.
As the scheme is not approved, there are very few restrictions in terms of what can be granted, and to who. Options can be granted to whomever you decide and at any amount. The downside is that the growth in these shares is taxed as income under PAYE upon exercise and as such, subject to both tax and NI.
Although the tax treatment is not favourable under this method, these are still a useful way of retaining staff and rewarding them for the company growth.
If you like the idea of rewarding staff based on the success they have helped bring to the company, but are reluctant to offer a share in the equity, then a phantom share scheme is a viable alternative. This effectively allows them to participate in the growth of the company, whilst not having a right to a share in the equity.
In essence this is a value linked bonus, however if the employee understands that their hard work directly affects the value of their bonus, and that there is no cap to the level of the possible windfall, this too can be a great motivating tool .
If you are interested in exploring any of these schemes in more detail, or employee share purchase schemes, please contact us for more advice.