There are lots of great ways you can motivate your staff and at the same time retain key members of your workforce and attract new talent to help your business grow. Some of these methods also provide tax savings for either the employee or the business owner too!
Employee ownership is one of the great ways you can retain and attract staff, and this can be achieved in a number of ways.
For example, there are many different types of employee share schemes available such as Enterprise Management Incentives (EMI). You can also offer key staff members Growth shares to encourage the team to work towards long-term company growth. If you are looking to exit or partly exit your business, you can also set up an Employee Ownership Trust (EOT).
In this article, we provides an overview of these three options.
Enterprise Management Incentives (EMIs) and other share schemes
There are a number of different HMRC-approved share schemes. Each of these share schemes come with their own tax benefits and conditions, but can also provide a brilliant way to incentivise your staff and keep them motivated to help the company grow. The most common schemes amongst SMEs are EMI share schemes and non- tax advantaged share schemes.
For EMI schemes, in a nutshell, employees are awarded options to purchase shares in the future (say three years’ time) in their employer’s company, usually at the market value of the shares today. The employee, therefore, receives a discount on the share price, but does not pay tax on the difference if the shares have grown in value by the time they are purchased.
Some share schemes can be targeted towards retaining and incentivising specific key employees.
It is also possible to run an unapproved share scheme. While these schemes do not receive the same tax benefits as a HMRC- approved scheme, they can offer a greater ability to tailor the share scheme to create a bespoke arrangement to fit the business and business owner’s requirements.
These share schemes can be great for any business, regardless of its size or future plans.
Growth shares are a class of shares awarded to employees, which typically give them capital rights above a set target value of the company. For example, if a company is currently worth £1m, a growth share awarded to an employee may entitle them to 5% of any value achieved above £2m, on eventual sale of the company.
This allows the business owner to retain full control of the company and rights to annual dividends, and ring fences any value built to date, but encourages employees to push to grow the capital value of the company.
Employees pay no income tax on the acquisition of the shares provided they pay full market value of the growth share. Depending on the conditions set on the shares, they are typically valued at a much lower price than ordinary shares. Provided the employee paid full market value for the shares, the only tax charge they will incur will be when they sell the shares.
This is becoming a very popular method of incentivising key staff members in SME companies, where the owners do not want to forfeit day-to-day control.
Employee Ownership Trusts (EOTs)
EOTs are becoming an increasingly popular way to pass ownership (or part-ownership) of a company over to the employees, whilst providing very generous tax breaks to the exiting business owner. If the specific conditions are met, the sale of the business to an EOT can be completely free of Capital Gains Tax.
The EOT ownership model has been likened to the John Lewis model. Essentially, the owners of the business sell their share (or some of their shares) to a trust which holds the shares in the business on behalf of the employees of the business.
As well as providing the business owner with a way to exit the business without paying any Capital Gains Tax, an EOT owned-company can also pay annual bonuses of up to £3,600 to employees free from income tax.
At a high level, many companies are eligible to set up an EOT structure, provided that they are a trading company, the shares are offered to all employees on similar terms (some consideration can be made for differences in seniority, length of service or remuneration) and a few other conditions are met. The sellers must also sell at least 51% of their shareholding to the EOT.
EOTs are quickly growing in popularity amongst SMEs and provide a really effective exit strategy for business owners.
This are just a selection of the ways a business can incentivise staff, retain key employees and attract new talent. Should any of the options for employee incentivisation be of interest, or should you wish to discuss further ways in which you can incentivise your staff or retain key talent, please do not hesitate to contact us.