Set up employee share schemes

Employee share schemes: an overview


Employee share schemes can involve giving free shares to employees, granting them options to buy shares at a specified price after a specified period of time, or allowing employees to buy shares, and sometimes matching these with free ones.

Tailor your share scheme

To tailor a share scheme to the needs and goals of your business, you can:

  • Rewards for meeting targets - make the award of shares or grant of options dependent on reaching certain milestones, eg meeting specific sales targets.
  • Stock market flotation - structure the share scheme so that employees become entitled to shares only if you sell or float the company on the stock market.
  • Limit the share scheme to certain key employees, eg those with scarce managerial or technical skills.
  • Length of service - require a certain number of years' service to qualify for shares - but make sure you don't discriminate, eg it could amount to unlawful indirect sex discrimination if employees need five years' service to participate in your scheme but women in your business tend to have less service than men.
  • Consider different share schemes - run a combination of share schemes or provide more favourable terms for directors, eg an enterprise management incentive scheme for directors and a share incentive plan for other staff. Consider the rules for tax-advantaged schemes before doing so.

Other types of share schemes

Share schemes approved by HM Revenue & Customs (HMRC) can have tax and National Insurance contribution advantages. See HMRC approved share schemes. Taxed (unapproved) share schemes do not have tax advantages but they don't have to meet the qualifying conditions for approved schemes, meaning you have more flexibility of design. See taxed employee share schemes.

While shares in publicly traded companies can be bought and sold easily, this isn't always the case in a private company, particularly if you have no plans to float or sell the business. If you want employees to realise the value of their shares, consider establishing and funding an employee benefit trust.

The employee benefit trust can acquire shares for sale that aren't bought by anyone else and these can then be recycled - together perhaps with newly issued shares - to meet future demand from employees.

Give some thought to how employees can see the value of their shareholding if your company is not publicly quoted. Shares in a private company can be valued in conjunction with the Shares and Assets Valuation area of HMRC.

Read HMRC guidance on shares and assets valuations for tax purposes.