Employee Share Incentives

HMRC approved arrangements allow firms to retain and incentivise key people in the most cost-efficient way.

Employee Share Incentives

Businesses naturally aim to attract the best talent, but, of at least equal importance, they want to retain their high performing employees and key individuals that are important to the company’s ambitions for growth. This can be difficult with a tight job market and competitors willing to offer more generous remuneration and benefit packages.

An approved share scheme arrangement, which will usually come with generous tax reliefs, can help bind employees to the business, with minimum immediate cost and potentially significantly higher future reward.

An example of planning


A company with 20 employees, of whom 5 are key to the future of the business, has annual profits of £500,000. Ambitious (but realistic) plans forecast that this can grow to £2 million. Those plans can only be achieved with concerted effort on the part of the whole team.

The company offers EMI approved share options over shares representing 20% of share capital of the company (after exercise). Exercise of the options is conditional upon the company achieving certain targets (i.e. achieving the targeted increase in profitability). The exercise price is agreed with HMRC at only £200,000 in aggregate for the 20% holding.

The company is sold to a buyer for £10 million shortly after the options are exercised.

The tax planning opportunity

The key employees are incentivised to ensure that the company achieves its growth targets. The shares they receive on exercise of the options are sold for an aggregate consideration of £2 million which is taxed at only 10%. After payment of the exercise price, that leaves them with £1.6 million.

The result

The incentive provided to the key employees has ensured they remain in post and has helped the company achieve its targets. It has cost the company nothing apart from professional fees for implementation. It would have cost the company almost £3.5 million to provide the same (net) benefit via a bonus.

In fact, the company is better off since it is entitled to a CT deduction £1.8 million (the amount by which the shares under option have increased in value). That is worth £342,000* and can be recovered from HMRC or will be added to the sale price (as a tax asset for the buyer).

The only cost is in the dilution of the shares owned by the existing shareholders. However, their interest has risen from £2.5 million (100% of a company valued on 5 times profits) to £8 million (80% of the company valued on the same basis). This may be higher if the tax asset is added to sale price.

The EMI arrangements will have facilitated the sale; the buyer will be happier knowing they are acquiring a company with incentivised employees.

(*) Based on applicable tax rates and policy in the 2020/21 tax year

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