The UK has one of the biggest startup ecosystems in the world. Second only to Silicon Valley, it’s the leading hub in Europe, and has to work hard to attract the tech talent that makes up 14% of the UK’s total workforce. Employee equity is an important part of that – so it’s no surprise that the UK has developed a progressive approach to share schemes. Four different tax-advantaged share schemes are available in the UK, and uptake of them is growing. In 2021, there was a 6% increase in the number of businesses offering employee share schemes.
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:
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Strike price: Can options be offered at a strike price below last-round valuation, without adverse tax treatment – reflecting that they are illiquid, high-risk, and non-preferred?
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Employee tax rate: Which rate is applied – income, capital gains, or something else? Are employee social contributions payable, and if so, how much are they?
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Employer taxation: Is there any financial impact for companies using share options? If so, when is it incurred? What rate is applied? Are employer social contributions payable, and if so, how much?
Lower scores were awarded for:
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Plan scope: Can all employees and company types benefit from favourable treatment of share options?
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Employee tax timing: Are employees taxed only when they sell shares, or when they exercise – or even at the point of grant?
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Minority shareholders and bureaucracy: When option holders exercise, they become minority shareholders, who may need to be consulted on various company decisions; does this make share options unattractive to companies? How does this affect the treatment of leavers? And what is the administrative burden and cost of managing the share plan?
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?
Setting up an EMI scheme
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 £6000; 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.
Alternatives to EMI
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.
The upper-value limit on CSOP is significantly lower than the maximum legal value of EMI shares (£250,000). However, in April 2023, it increased from £30,000 to £60,000 per person. This development, announced in the UK Government’s Spring 2023 Budget, makes the CSOP scheme a more effective employee incentive.
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.
How to manage your UK employee share scheme with Carta
From obtaining a valuation and issuing your first options online to submitting annual reports to HMRC and Companies House, Carta makes managing share plans in the UK much simpler.
Company valuation
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, Carta 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 your account for future reference.
EMI issuance
Once your EMI scheme is set up, you’re ready to start issuing equity to employees through Carta. 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. Carta 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.
EMI notification
Previously, companies were required to notify HMRC of any new options issued under an EMI scheme within 92 days of the grant date. The EMI notification shares information about new grantholders, the amount issued, the vesting schedules and exercise prices.
However, this rule has now changed: for EMI options granted on or after 6 April 2024, you’ll simply need to include the grant notification in your EMI annual return and file it with HMRC by 6 July.
Annual returns
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, Carta 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.
Exercising share options
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.
