According to HMRC, 16,330 companies in the UK operated some form of tax-advantaged employee share scheme during the tax year ending 2021 – a 6% increase on the previous year.
The figures revealed that employees received an estimated combined £480m in income tax relief and £280m in national insurance contributions (NIC) relief via their employer schemes, with Enterprise Management Incentives share options the most popular vehicle.
There are several benefits to companies operating an employee share scheme – not least increased engagement. Employees who earn shares feel more connected to their organisation. In a tough labour market, in particular, it is seen as a valuable route to attracting and retaining staff.
‘The idea was to give our employees some skin in the game’
One strong appeal lies in the tax efficiency for individuals. If the value of the company grows, a shareholding will attract some exemption at the time that shares are sold.
Five common models
There are different kinds of tax-advantaged schemes. The five most common models are:
- Save as you earn (SAYE) – employees make monthly contributions to a scheme for a three or five-year period. The combined pot is used for share purchase. According to HMRC’s 2020 report into tax advantaged share schemes, it is considered an easy scheme to understand and operate, offering the ability to receive cash (free of PAYE and NIC) instead of shares at the end of the holding period.
- Company share option plans (CSOP) – all or certain employees are invited to purchase share options.
- Share incentive plans (SIP) – employees are given or invited to purchase shares, with employers having the option to match their contributions. SIPs are often used as an alternative form of remuneration for skilled or senior people and often lead to a greater investment in a company’s performance, say the HMRC report authors.
- Employee ownership trust (EOT) – employees are awarded shares in the business that are held within a trust.
- Enterprise Management Incentives (EMI) – SME employees are invited to purchase share options.
According to HMRC, CSOPs and EMIs are often used to attract new, highly skilled employees, with EMIs particularly used as benefits for employees who are regarded as integral to the success of the company.
Succession planning
Helen Moreton, founder and director of Boombox Consulting, which works with businesses in a non-executive capacity advising on governance, leadership and culture, finds that the decision to introduce some form of employee ownership is often linked to a desire to see the original values of the business retained in the future.
‘Speaking to founders who decide to move to some form of employee ownership, it is often about succession,’ she says. ‘They are looking to the future of their business and who would be best placed to ensure that what is important to them remains important in the future. ‘Their thinking is often: “The people who have built this business alongside me are the right people to take it forward.”‘
Employee ownership trusts, Moreton points out, have seen strong interest and growth. There are more than 2,000 EOTs in the UK now, compared with only 100 just 10 years ago.
‘I want everyone in our business to share in the success and wealth they create’
According to the Employee Ownership Association, the top 50 employee-owned companies in the UK have combined sales of £21.1bn and a combined 108,405 employees.
As Hugh Facey, chairman of Gripple, puts it in Employee ownership – how to get started: ‘I want everyone in our business to share in the success and wealth they create. ‘As founder and owner, I consider myself a custodian of the business for the next generation. There is no better way to exercise that role than by implementing some form of employee ownership.’
EOTs appear attractive to entrepreneurial businesses. Lush is 10% owned by its employees. Go Ape’s employee ownership is 90% and, perhaps the most famous, the John Lewis Partnership is 100% owned by employees, who are referred to as partners.
Retention and motivation
Louise Campbell, HR director at aerospace services company 2Excel, says her company became employee owned in 2018. The founders of the business, Chris Norton and Andy Offer, were motivated by a desire to reward and retain employees in what is a very specialised sector.
‘The idea was to give our employees some skin in the game.’
‘Our founders went to our advisers and said that there were two main things we wanted to do. We wanted to grow the business and its value, and we wanted to reward the people who help us to do that,’ she says.
‘In growing the business, we also need to incentivise, motivate and retain the people who would help us do that.’
Of the various employee ownership and share scheme models put on the table, 2Excel chose an EOT, where the shares are held on the employees’ behalf in a trust.
‘In growing the business, we need to incentivise, motivate and retain the people who would help us do that’
The shares – 51% of the value of the company at the time – were sold to the trust at a discounted price. ‘No cash has exchanged hands at this point. We are relying on the growth of the business to pay back that IOU, as it were, in the future. What’s left would be shared between the beneficiaries,’ she explains.
Other organisations that use the EOT model may use profits year-to-year to pay down IOUs and by doing so work towards what is known as the ‘financial freedom day’.
‘The difference for us is that we need to have an event to realise the value of the company, whether through a trade sale, private equity ownership or IPO,’ says Campbell.
While financial freedom day has yet to occur at 2Excel, the EOT has encouraged greater transparency around company finances and its future, along with ensuring employees have a voice.
‘I talk about the intangible benefits and the fact that we’re all in it together on a journey,’ she says. ‘They are the benefits for me and the ones that I’m trying to instil.’
