Did you know you don’t have to pay your employees?
Well, not quite, I am talking rubbish here. The minimum wage is still a thing, and your employees should be earning at least that for every hour they work for you. However, for the ones you really like that get more than that, there are plenty of other ways you can reward your staff rather than paying them lots of money every year – some of them even tax-free. I’ll leave it to accountants and HR professionals to go through the details of these, your many options should all be considered before jumping on this bandwagon, but it seems a good one… provided you get it all done properly and get your paperwork sorted out.
What are you going on about?
Share option schemes for employees. There are virtually always these kinds of schemes running in the background by the government, its just a case of looking for them and knowing that they are around. The schemes also go through elements of changes and updates and sometimes better/worse offers crop up. As of April 2023, the cap on how much you can award to an employee will double, which allows businesses to lure employees to them, and reward their current staff completely tax free.
Explain more, can I get involved?
Essentially, you will be able to offer employees the option to purchase shares in the business, up to a maximum value of £60,000. Depending on the size of your business, this can be a huge chunk of the business they are allowed to take ownership of. The option is still just an option, they have no obligation to purchase them, but they do need to within 10 years of granting that option, and after 3 years of being granted the option in order to qualify for tax relief. Within this scheme (the CSOP) employees don’t pay any national insurance or income tax on the shares when they are granted. The shares do need to be purchased for market value (as confirmed by HMRC) however this is dated at the grant date, so if you are a relatively new business or going through a huge period of growth, in 3 years’ time that could prove an enormous saving on the shares. Though there are other options for this sort of thing if growth is your main aim such as growth shares and joint ownership arrangements.
That’s good but not totally free for my employees… what else?
There is another option I have come across lately that is the Share Incentive Plans, this is a completely free award you can give your employees £3,600 worth of shares each tax year, and if they stay in the plan for 5 years, they won’t pay any income tax or national insurance on them either. This scheme also allows you to totally avoid any capital gains tax if they keep the shares in the scheme until they sell them. You can also give employees the option to purchase shares out of their salary pre-tax, and you are then allowed to match them with a further two shares for each share they purchase. Under this scheme all employees must receive shares on the same terms, however their award or allocation can be linked to additional milestones.
So, what are the downsides?
They are the same downsides to awarding any person shares in your business really! You must remember that that person owns a portion of your company which you have given away. Unless you have agreements that say otherwise that person may have a say in the business, in the proportion of share given to them, which could mean they can form a majority share with other employees or shareholders and make big decisions. Each time your business grows that person will receive dividends in proportion to their shareholding too, which could be more than they deserve, depending on the scheme you go for you may be able to give them a different class of shares that allows you to pay them a different amount of dividend to other directors. The last thing that can be a nightmare is if they leave, or if they die. Some of these are covered by the rules of the scheme you have decided to go for and it invalidates the tax savings if you don’t stick to them. If persons leave your business whether for good leaver reasons or bad leaver reasons, you need to be able to recoup the shares to be owned by the business again rather than them passing to a stranger, and this needs to be written down carefully to avoid tax bills coming at you!
What do I need to write down?
Firstly, you need a share option agreement, this will detail how they can exercise the option to purchase shares, often people will put time limits in here to comply with the schemes, although you can also choose to include qualifiers, such as they must reach certain targets, or the business may need to make certain sales before they can choose to purchase these. The other thing you need to look at is your shareholders agreement, it should contain details of all the current shareholders, how decisions are made, how dividends are paid, and how shares can be transferred – among other things. When an employee exercises their right to purchase shares they will need to sign up to this shareholders agreement, so it must be current and up to date and be acceptable to them.
Can you help?
We can get involved with drafting your shareholder agreement and share option agreements and will do this under our usual fixed price packages. However this is not all that you need to do. You will need to look at your employment offers with current and new employees and decide how widely this is rolled out, and you will need to let HMRC and companies house know what you are doing – although a lot of these agreements can be private and not shared publicly, all shareholding should be registered on companies house. We would like to work closely with your accountant and HR advisers to ensure that the whole process is seamless and you are fully compliant with the law and have all the correct paperwork all signed off.