The main reason for using employee share incentive plans is to recruit, retain and motivate employees. They are also used to help align the interests of employees, particularly senior executives, with those of shareholders. The aim of this alignment is to encourage senior executives to consider the best interests of shareholders in their management of the business.

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Employee share incentive plans can also reduce employment costs. Successive governments have taken the view that encouraging equity incentives can improve the general economy. Tax legislation has therefore been used to introduce specific employee share scheme structures that enjoy valuable tax reliefs.

Employee share schemes take many forms, but share schemes can be very broadly divided into tax-advantaged share schemes and non-tax-advantaged share schemes.

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Tax-advantaged share scheme

An employees’ share scheme providing shares or share options that qualify for statutory tax reliefs. There are currently four types of tax-advantaged share schemes:

  • Company share option plan (“CSOP”)
  • SAYE option scheme
  • Share incentive plan (“SIPs”)
  • Enterprise management incentives options (“EMI options”)

Tax-advantaged schemes must meet certain requirements to qualify for beneficial tax treatment.

These schemes do not need to be approved by HM Revenue & Customs in advance, but instead must be notified to HM Revenue & Customs online and companies must certify that their schemes meet the statutory requirements. However, it is still common to refer to tax-advantaged schemes as approved schemes. Tax-advantaged schemes may also be referred to as tax-favoured share schemes.

Non-tax-advantaged share scheme

An employees’ share scheme that does not qualify for statutory tax reliefs. Non-tax-advantaged share schemes may be referred to as unapproved schemes. Non-tax-advantaged share schemes might also be referred to as non-tax-favoured or fully taxable share schemes.

Although non-tax-advantaged share schemes do not qualify for specific statutory reliefs, some schemes will be designed to be tax-efficient and will, in some ways, be taxed in a similar way to tax-advantaged schemes.

If your business is implementing a share scheme contact our employment team today.

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