Adoption rate of employee share plans

Ever wondered how many HMRC approved share plans are operated in the UK and how much in terms of tax this is costing HMRC? The technical data published by HMRC gives a good overview as detailed below.

Tax year 2018-19 – the facts on share plans

The key findings from the report include:

  • 14,420 companies operate a tax-advantaged scheme, an increase of 8% compared with 2017-18. 85% of these companies operate only one scheme.
  • The estimated annual cost of providing income tax and National Insurance contributions (NICs) relief for the four schemes in total is around £920 million (£560 million income tax relief and £360 million NICs relief).

The estimated value of income tax and NICs relief across four tax-advantaged schemes was £870m.

It seems employers feel in the current climate of uncertainty and rising tax costs now is the time to operate share plans.

Facts sitting behind the data

HMRC data needs to be considered in line with data from other sources which indicates that companies running share plans out perform those who do not.

HMRC data does not deal with the numerous companies who do not operate HMRC approved share plans electing instead to run other types of share plans – usually unapproved options and LTIPs.

What the statistics mean for HMRC approved share plans

The take up rate for EMI options is far greater than that for any of the other HMRC approved plans.

In our experience, the Enterprise Management Incentive (“EMI”) option scheme was the scheme of choice, particularly for smaller non-listed companies. This is reflected in the HMRC statistics, which show that the increase in the number of companies taking up HMRC approved schemes is attributable to an increase in EMI schemes. Until recently Employee Shareholder Shares were a popular choice for top management and directors but high level of abuse made the government withdraw the scheme as of 1 December 2016.

Statistically the take up rate for HMRC approved SAYE plans and HMRC approved Share Incentive Plans (“SIPs”) are much lower than the take up rate for HMRC approved Company Share Option Plans (“CSOPs”). This is perhaps because CSOPs can be implemented on a discretionary basis whereas the HMRC approved SAYE and SIP plans are all employee plans – heavy on dilution and implementation costs.

EMI share options

For those that meet the necessary qualifying criteria, EMI share options provide considerable tax advantages, not only for employees but also for their employers, who can claim corporation tax relief calculated by reference to the income tax that would have been payable if the option exercise was not an EMI option.

Example of corporation tax savings with EMI options

If the employee was exempt from income tax of say £20,000 on exercise of his EMI option then the employer would receive a corporation tax deduction on the £20,000 which at a 20% rate of corporation tax (as at 2018/19) is a tax saving for the employer company of £4,000. If say 40 employees exercise EMI options on the sale of the business that would give a corporation tax saving of £160,000.

No tax is payable by the employee on exercise of the EMI option. However tax is payable on sale of the shares acquired on exercise at 10%. This is far less than comparable rates of income tax.

Prediction for EMI options

EMI schemes became more attractive when the value of shares over which EMI option can be granted. This is in respect of each individual employee, increased from £120,000 to £250,000 (calculated as at the date of grant). The HMRC report forecasts that future figures will show an increase in the number of employees granted EMI options and the value of EMI options granted because of this. We anticipate EMI will continue to be extremely popular amongst high tech companies. This is especially as EMI and EIS schemes can be combined. As far as we know there are no plans within HMRC to abolish EMI options.

Catherine Gannon is a member of the employee share plan team.  There are many surveys and statistics which show that companies with employee share plans in place out perform those without.  We implement a wide range of solutions for a wide range of business needs.

Catherine Gannon

Catherine is an extremely experienced solicitor and deals with all types of corporate and commercial matters and advice and also tax law. She is well known for turning complex problems into solutions, priding herself on always finding a way. In her spare time she runs Gannons!

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