In Not Optional’s ranking of the ‘friendliness’ of employee share options in 24 European Nations, the UK came in 7th. In general, the UK scored well across the six criteria Not Optional assesses for, receiving full marks for:
Lower scores were awarded for:
So, what plans are available, and what are the nuances you need to be aware of as you set up your employee share scheme in the UK?
The most common way for UK businesses to award equity to employees is via the Enterprise Management Incentive (EMI) scheme. Businesses with assets of £30 million or less can offer employees share options up to the value of £250,000 in a 3-year period.
Employers are not taxed for granting EMI shares, and may claim a corporate tax deduction equal to their employees’ gains. The costs of the scheme’s implementation and administration can also be deducted.
Employees, on the other hand, are only taxed during share sales. They are entitled to a capital gains allowance of £11,700; capital gains above that are taxed at 20%. EMI options held for longer than two years entitle employees to entrepreneurs’ relief, which carries a reduced 10% tax rate.
Regardless of their size, some companies won’t ever qualify for EMI. Non-qualifying trades include hotel management, financial services, law firms and accountancy firms.
The most popular EMI alternative is the Company Share Option Plan (CSOP). CSOPs require employees to hold their options for three years before exercising, unless you meet certain exemptions. Additionally, the upper-value limit on CSOPs is set at £30,000, significantly lower than the maximum legal value of EMI shares (£250,000).
Employees don’t have to pay income tax or make national insurance contributions for their CSOPs, but may have to pay capital gains tax of up to 20% when they sell the shares.
If neither EMI or CSOP is suitable for your business, you still have options. Growth shares reward employees when the company exceeds a predetermined threshold. Another option is a Share Incentive Plan (SIP) which offers tax exemption but requires that companies offer it to all employees.
From obtaining a valuation and issuing your first options online to submitting annual reports to HMRC and Companies House, Capdesk makes managing share plans in the UK much simpler.
To set up an EMI scheme, you’ll first need to provide HMRC with two valuations stating what shares in your business are worth. The first is your business’ unrestricted market value (UMV), and the second is its actual market value (AMV).
If you need support with company valuations, Capdesk can help. Our dedicated valuations team will work with you to prepare the valuations and all accompanying documentation required by HMRC. Once your AMV and UMV have been approved, you can store them in Capdesk for future reference.
Once your EMI scheme is set up, you’re ready to start issuing equity to employees through Capdesk. Simply upload the scheme details and documents in the equity awards section of the platform, allocate shares to the incentive pool and start issuing grants to your employees.
Grantholders and witnesses can sign the agreements from wherever they are, making the entire process remote-friendly yet still totally compliant. Capdesk takes care of compliance in other ways, too: if you issue grants that exceed EMI or CSOP limits, the platform notifies you of the breach.
For any new options issued under your EMI scheme, you’ll need to notify HMRC within 92 days. The EMI notification shares information about new grantholders, the amount issued, the vesting schedules and exercise prices.
Capdesk makes this as simple as possible, populating EMI notification templates with all the required information drawn straight from your account activity. All you need to do is cross-check the documents and file them with HMRC.
For both EMIs and CSOPs, you’ll need to create an annual return. This is due on the 6th of July each year, and gives HMRC an overview of all share option activity including adjustments, lapses and exercises.
At the click of a button, Capdesk generates your ERS Annual Return. It’s based on the data within your account, leaving minimal room for error, and is delivered to your email for verification before you send it off to HMRC.
If an employee leaves before their options have fully vested, you’ll need to follow a number of steps to ensure they are offboarded from your share scheme compliantly. We’ve built a comprehensive workflow for employee offboarding that gives both employers and departing staff flexibility, control and oversight of the process.