The recruitment, retention and motivation of staff is vital for the long-term success and growth of any business.
Whilst it is important that all staff feel engaged, most employers can identify a handful of senior individuals who are critical to the future of the company. It is important that these individuals are not only appropriately rewarded but are also provided with incentives to help grow the business. There are a number of tax efficient ways that this can be achieved, using equity awards, share options and other tax efficient benefits.
1. Enterprise Management Incentives (EMI)
These HMRC approved share option schemes provide tax advantages for independent trading companies. They give employees an option, or right to acquire shares in the future, at today's value. There are no income tax or NIC's on the grant, or on exercise, of the options, and the shares will be subject to CGT on sale.
2. Flowering or Growth Shares
A new class of share is created often with limited voting and capital rights when awarded which only 'flower' and acquire value in the event the business is sold or floated above a pre-determined value. Ideal for private companies seeking a sale in the next 5 years and looking to attract and retain key employees.
3. Employee Shareholder Shares
A company may issue new shares to employees in exchange for the employee giving up certain employment rights. On sale these 'employee shareholder shares' are exempt from CGT on up to £100,000 worth of gain. This is perhaps a way of attracting and keeping good people in risky yet potentially rewarding trading ventures.
4. Share Incentive Plans
This scheme must be open to all employees on the same terms and is operated through a trust. Employers can award 'free shares' up to £3,600 per tax year. If all shares are kept in the trust until they are sold the employee will not be liable to Capital Gains Tax.
5. Company Share Option Plan
Tax advantaged share option scheme for executives. Maximum value of options £30,000. Employees granted options must not have a material interest of more than a 30% shareholding in the company. Generally, no liability to income tax and National Insurance Contributions (NIC's) arises on the grant or exercise of the option.
6. Phantom Share Plans
A phantom share option plan is a cash bonus plan under which the amount of the bonus is determined by reference to the increase in value of the shares subject to the option. No shares are actually issued or transferred to the option-holder on the exercise of the phantom share option. There are no regulatory requirements to be met and the plan is extremely flexible. Administration cost of the plan is minimal. However, payments are subject to tax and NIC.
7. Employee Ownership Trust
Offers owner managers another means of exiting their family business, by effectively selling at least 51% to the employees through a trust. Provided the legislative hurdles can be negotiated such sales are CGT free. In addition the company can pay tax free bonuses to employees of up to £3,600 per annum (still subject to NIC's unfortunately).
8. Salary Sacrifice Benefits
Under salary sacrifice, staff give up the right to receive a portion of salary, which is instead used to provide a benefit, typically, free of tax and NIC. Employers also save up to 13.8% on NI contributions. Tax efficient perks include mobile phones, bicycle loans, childcare vouchers, pension contributions, work-related training, health screening, and bus passes to travel to work.
9. Executive Pensions
Despite the Government's reduction in funding and fund limits, pensions can still be a very tax efficient means of funding for retirement. The ability of Small Self- Administered Schemes and Self-Invested Personal Pensions to acquire business premises which are then let to the company make them well worth the effort to understand.
10. Loans & Dividends
Loans below £10,000 a year are not regarded as a taxable benefit, so only loans in excess of this will potentially suffer a charge to tax. Post April 2016 we all get a tax free dividend allowance of £5,000. Use this (perhaps in conjunction with 2 above) for key shareholder employees.
If you would like more information on how to incentivise your key staff using any of the tips set out in this article, or would like to discuss your tax affairs in general, please contact us.
David Robinson
As a Tax Partner, I advise clients on all aspects of UK tax, ranging from business taxes, transactions and private client matters, helping to achieve the objectives and aspirations of businesses and their owners.
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