Set up employee share schemes

If you decide to set up an employee share scheme, there could be a number of benefits for your business. However, there are also some potential risks that you should be aware of before making any decisions.

Employee share schemes: advantages for employers

Benefits to employers of setting up an employee share scheme may include:

• motivating your employees to become more productive
• aligning employees' interests with those of shareholders
• recruiting new talent and/or retaining valuable employees
• compensating for lower salaries and relieving pressure on cashflow
• remunerating employees in a tax-efficient way
• increasing staff loyalty and reducing employee turnover
• raising working capital
• realising owners' investment

Employee share schemes: disadvantages for employers

Some potential risks of having such an employee share scheme include:

• Share price volitility - the effect on morale and retention if the share price falls - particularly for share option schemes.
• Administration costs - short-term costs of drawing up and getting a share scheme approved, plus long-term costs of managing the scheme and record-keeping.
• Dilution of share ownership - as more shares are issued each share you own becomes a smaller percentage of the company - you could lose control of the business. You must retain 75 per cent of the voting shares if you want to continue taking all important company decisions.
• Financial expectations - risks of arousing unrealistic expectations among employees of the financial rewards.
• If employees eventually wish to sell their shares in an unlisted company (one without shares on a public stock exchange), you may need to run an internal market for the shares, perhaps through setting up an employee benefit trust.

Tax advantages for HM Revenue & Customs (HMRC)-approved schemes

Your business may be entitled to corporation tax relief on the cost of setting up an employee share plan, as well as for the cost of providing free shares and matching shares. No employers' National Insurance is due on the shares/options if the specific conditions of each share scheme are met. See tax and Employee Share Schemes.

Taxation of these schemes can become quite complicated, as can the process of getting HMRC approval, so seek expert financial advice.

For an explanation of the different types of share schemes, see HMRC approved share schemes.