Time to revisit share options?
30 November 2010

The recession combined with cuts in public spending have seen many technology companies revising expectations of growth and value. This may have an impact on staff, many of whom may not have had the benefit of any pay increases recently.

Many companies are now re-looking at share schemes and share options schemes as a means of rewarding key staff.  If share values are currently depressed, now may be a good time to maximise the benefit of such schemes.  A company’s performance generally improves when the interests of both employees and employer are aligned.

Whether a scheme based on shares or share options is appropriate often depends on the attitude of the existing share holders.

There is often nervousness in giving shares directly to staff and there can often be significant tax exposure if it is dealt with in the wrong manner.  As a consequence share option schemes have become increasingly popular.

A share option is a right to buy a certain number of shares in the company at a fixed price in the future.  There are a number of variations of tax efficient share option schemes available, although the most popular variation is the Enterprise Management Incentives scheme.

Enterprise Management Incentives (EMI)

EMI is a HMRC approved share option scheme for small independent trading companies in the UK.

- ‘Small’ means gross assets of no more than £30 million and fewer than 250 employees. 
- ‘Independent’ means not controlled by another company. 

EMI allows such companies to provide tax efficient options to selected employees over shares worth up to £120,000 per employee.

The key benefits of the EMI scheme are as follows:

  • For the employee: tax is only payable when the employee has realised the value in the shares by selling them (and should therefore have the funds to pay the tax).  The employee’s profit on the shares is taxed at capital gains tax rates, currently 18% or 28% (or possibly even 10%) which compares favourably to income tax rates.  Normally there will be no National Insurance.
  • For the employing company: the company can claim a deduction from its taxable profits not only for the costs of establishing the scheme, but also for the value passing to the employee on exercise of the EMI options, even though there is no real ‘cost’ to the company.

Other share incentives

Whilst EMI schemes have been popular for many years, they do come with a cost in terms of initial set up.  Many schemes were established under conditions and expectations which may now be unrealistic or unachievable given the economic conditions.

Whilst employers have the option of re-writing schemes with the associated cost, there has also been a trend for companies to issue shares whilst company values have been low as they do not attract significant tax liabilities on issue.

It is critical where such shares are being used for incentive purposes that there are either effective provisions in the company’s Articles of Association or a shareholders’ agreement to ensure that the shares can be bought back for an agreed amount in the event an employee leaving prematurely.

For further information, please contact John Detheridge at