Chartered Accountants and Professional Business Advisers

Motivating and retaining the right team is vital for any business, especially small and medium-sized firms where every individual can be critical to success. So it’s important to make sure your employees feel valued. For most people, this is usually down to a combination of how much they get paid, along with other factors such as a pleasant working environment, being appreciated for doing a goodjob, having flexible working arrangements or working from home. For others it could be as simple as a better-sounding jobtitle.

Salary sacrifice

Increasing your employees’ income involves more than just net salary costs of course – it costs £1.67 to put £1 in the pocket of a typical £30,000 employee, and £1.96 for a typical £50,000 employee. This can make it hard to compete with larger businesses. One option is allowing employees to swap some of their cash pay in exchange for non-cash benefits. Many ‘salary sacrifice’ schemes are no longer allowed, but schemes that allow salary to be sacrificed for pensions (and pension advice), childcare, a bike to get to work and ultra-low emission cars are still available.

Even though pensions are by far the most popular form of salary sacrifice, the average UK pension pot is less than £50,000, not nearly enough to provide a decent supplement to a state pension which you may need to live on for 30 years or more. By law most employers must now have a pension plan for their employees to pay into. The costs of setting these up are relatively low, and may involve re-issuing contracts. If employees want to top-up their pensions it can be significantly better than making personal contributions because of the national insurance saving, as shown in the table below.

Enterprise Management Incentive

If you’re a business owner, your long-term exit plan may be to sell the company and you’ll want to build up the value of the company in preparation for this. Ideally, you’ll want your key employees to share in this goal, which is usually achieved by incentivising them in some way. An Enterprise Management Incentive (EMI) scheme can do this tax-efficiently by granting up to £250,000 worth of share options to key employees.

To qualify, your company can’t be controlled by another company and must be a trading company, with gross assets of under £30m and fewer than 250 employees. Some types of businesses are excluded, including those involved in share dealing, property development, financial activities, hotels and nursing homes.

For employees to qualify they must work 25 hours a week for the company (or, if less, 75% of their working time each week). The employee can’t own more than 30% of the company.

Tax treatment of share options

There are no income tax or national insurance consequences when an EMI option is granted, or when it’s exercised (i.e. cashed in) within ten years of the grant, provided the option price (i.e. the price at which the employee gets the shares) was not lower than the market value at the time the option was granted. When the share options are exercised, the company can get a deduction for corporation tax on the excess of the value of the shares over the option price.

Employees will be subject to capital gains tax (CGT) (rather than income tax) on the profit they make when they eventually sell the shares. However, this will often qualify for the 10% entrepreneur’s rate of CGT. The shares must be owned for at least one year from the date the option was granted (not exercised) to qualify for this and the usual 5% ownership requirement does not apply to EMI shares.

Specific advice should be obtained before taking action, or refraining from taking action, in relation to the above. If you would like advice or further information, please speak to your usual Shipleys contact.