Employee share schemes on the rise as firms look to attract and retain staff

Data from HM Revenue & Customs today revealed that employees received an estimated £480m in Income Tax relief and £280m in National Insurance contributions relief in the tax year ending 2021 from tax-advantaged Employee Share Schemes (ESS). Enterprise Management Incentives (EMI) were the largest contributor to the total cost of tax relief.

The total number of companies operating ESS in tax year ending 2021 was 16,330. This is an increase of 6 per cent from the previous year.

Paul Twist, business taxation associate director at leading wealth manager Evelyn Partners (recently rebranded from Tilney Smith & Williamson), comments, “share Schemes can be used to give employees a longer-term interest in the success of a company and improve staff retention for less than it would cost the company to achieve this through pay rises alone.

“This is particularly salient at a time of increasing strike threats over pay being outstripped by inflation. Many of the country’s largest companies have employee share schemes in place, with studies finding that ownership of company shares can motivate employees to be more productive as well as have a positive impact on employee retention.

“Share-based remuneration arrangements can help align the interests of shareholders with employees as well as help to conserve cash during an economic downturn where a share scheme is used in place of employee bonuses or pay rises.

“The UK tax legislation includes a number a tax advantaged share schemes where the gains received by employees are taxed as a capital gain rather than employment income and currently subject to lower rates of tax (based on current tax rates).

“Finally, share schemes can be a differentiator in what is currently a competitive labour market to retain or recruit key employees.”

Digging down into the data it is noticeable that Enterprise Management Incentives (EMI) are on the rise and were the largest contributor to the total cost of tax relief and number of ESS.

Paul adds, “EMI options are specifically aimed at smaller companies and to help provide them with a mechanism to compete for senior hires where they may not be able to based on salary quantum alone.

“The tax reliefs that can apply to EMI options include no tax on the grant of an EMI option and a gain realised on sale of the shares acquired can be subject to an effective 10 per cent tax rate if certain conditions are met.”