7.6.2022 | Tax

Issuing employee shares – all you need to know

Beatons’ Taxation Director John Oakley gives an overview.

Offering employees shares in the company is becoming increasingly popular for business owners and directors.

It is often seen as a more valuable benefit than cash bonuses or other incentive schemes, and studies have shown it can lead to more motivated, productive employees.

There are many ways to incentivise employees using company shares, and it is a good idea to seek guidance.

Why offer employee shares in the company?

Employees are generally given shares, or options, to increase employee engagement and retention.

An employee with shares is more likely to stay with a business as they have a stake in it. Motivation to help the company succeed is increased, potentially leading to an increase in the value of the business. Offering employee shares is also a good way to attract the best talent.

Should a company offer shares or options?

Companies can either issue shares or options.

Options are the right to purchase shares at a specific price sometime in the future. They can be used as an opportunity for a company to utilise performance targets before the options can be turned into shares.

Share options are largely split between HMRC approved and unapproved option schemes. Approved schemes will generally offer the right for the employee to purchase shares at a later date but at the market value of the shares when the options are issued. An employee can then decide to exercise the option to convert the option into shares. When this is decided, the employee will be required to pay the specified price.

The ideal scenario for the employee is that in the period between being offered the share option and deciding to exercise it – the shares have gone up in value substantially. There is no tax charge on exercising the option.

Unapproved options increase the likelihood of higher employment taxes being levied when the share options are exercised.

Some businesses opt to move straight to issuing shares, which means that a shareholder can then be paid dividends. This is usually a more tax-efficient method of remuneration for the company, and the employee, as dividends are not liable to National Insurance.

How to structure arrangements

There are many different methods of structuring employee share incentives, and the terms of the shares must be stipulated in the company articles of association. This will usually determine:

  • Any voting rights attached to the shares
  • Entitlement to consideration on sale or winding up
  • Entitlement to dividends
  • Whether the shares should be offered to other shareholders before they can be offered for sale elsewhere

Separate shareholder agreements can also cover additional share stipulations which a company does not wish to be a matter of public record, such as performance-related targets.

Care should be taken when altering share rights or offering shares with restricted rights, as significant tax anti-avoidance measures can negate some of the tax advantages involved.

What else should we know about taxes?

If an employee receives shares in the company they are employed by, then these will fall within employment-related securities legislation.

There is largely only one situation where shares acquired in the company you are employed by will not be deemed employment-related and these are when they have been transferred between family members.

Employment-related securities can result in the employee being liable to tax on the value of the shares as employment income, so significant care is required in the arrangements made.

We would suggest in most instances, where shares are to be offered, that employers approach HMRC to agree on a valuation before proceeding with the transaction

For help and advice on offering employee share schemes, as well as further information on selling the business or buying back shares from departing employees, contact Beatons at  info@beatons.co.uk or call 01473 659777.