New practice: COVID-hit companies considering whether it’s better to reward employees with shares rather than salary

This can reduce salary costs for the company and provide attractive tax benefits for employees, to motivate them and bind them more closely to the business. For example, setting up a tax-approved Enterprise Management Incentive (EMI) scheme can reduce an employee’s tax rate to 10%, payable when the underlying shares in the EMI scheme are sold, compared to an immediate tax rate of up to 45% on their cash salary plus National Insurance Contributions.

While EMI schemes are simple and flexible (and do not have to benefit all employees) companies can also consider other tax-approved schemes, such as Company Share Option Plans or Share Incentive Plans.

If a company is unable to meet the criteria to set up a tax-approved scheme, unapproved schemes are also available. For example, many companies have issued ‘growth shares’, holders of which only benefit from future growth in the company – for example, by reference to performance thresholds or increases in share value realised on a share sale - and not past growth. Since there is no certainty that a company will grow, this means that the shares can be issued for a low value at the outset, so they are affordable to employees.

A particular use of growth shares is as an alternative to issuing shares qualifying for Business Asset Disposal Relief (BADR - formerly called Entrepreneurs’ Relief), where the conditions required to qualify for BADR cannot be met, or the company wants to provide an incentive to non-employees.

If company owners want to pass their company wholesale to employees, they can consider an Employee Ownership Trust, which passes ownership to an Employee Benefit Trust structured to minimise tax.

Operative date

• Now

Recommendation

• Companies should consider whether there is scope to reward employees with shares or share options rather than salary, assess the schemes available and the commercial and tax consequences.