A share option is the right to buy a certain number of shares at a fixed price, sometime in the future. Employees can exercise their options - buy the shares - after the vesting period or upon the satisfaction of preset performance conditions. The employer can make the granting and exercising of options dependent on reaching certain targets which may be applicable to the company or the individual.
There are a number of different share option schemes and it is important to select the most appropriate for your company. We are able to advise and implement a scheme which will help your company:
- attract, retain and motivate key employees through share options
- retain flexibility and control over many aspects of the share options you grant (i.e. subject them to performance measures and/or time limits)
- improve reported results by providing share options instead of salary to employees
- increase competitiveness by offering a diverse remuneration package and opportunity for ownership
Enterprise Management Incentives (EMI)
The EMI scheme is the most popular type of share option scheme available. It is approved by HMRC and enables share options to be granted to selected employees without any tax implications.
A market value for the shares is agreed at the time they are granted and if this amount is paid by the employee on exercise of the option then an income tax liability will not arise even if the shares are worth considerably more at that time.
As stated above, the company may place conditions which must be satisfied before the options can be exercised and these will ensure that the employees perform at a sufficient level to justify the reward of ownership in the company.
Key features of the scheme:
- options over shares worth up to £250,000 at the date of the grant, can be granted to an employee, and these are tax and NIC free on the grant
- on exercise the employees can obtain shares at a large discount without any tax implications
- the scheme is available for employees selected at the company's discretion
- the company will get corporation tax relief for the costs of operating the scheme
Save as you earn schemes
Employees are granted options at a discount of up to 20% at the start of the savings contract. They can save a fixed monthly amount of between £5 and £500 for 3, 5 or 7 years. At the end of the savings contract a tax-free bonus is payable. Employees use the proceeds of the savings contract, including the bonus, if they want to exercise the option. If they do not, the proceeds are repaid in cash, tax free.
The benefit is that there is no tax or National Insurance charged on the discount or on the gain made when the option is exercised.
Company share option plan
Employees are granted options to acquire shares at the market price at the time of grant. Employees may be granted options over shares worth up to £30,000 at any one time. There is no tax or National Insurance charged on the gain made when the option is exercised, provided that the options are held for at least 3 years unless participation ends through disability, redundancy or retirement.