Not every business can meet the strict criteria for EMI and that’s perfectly fine. There are other effective and tax efficient ways to reward and retain key staff through equity or cash-based incentives. Below we explore three popular alternatives and highlight how Plus Accounting can guide you to the right scheme.
Growth Shares (or “Founders’ Shares”)
What they are:
Growth shares carry value only if the company exceeds a defined “hurdle” valuation, typically the current market value plus a premium. Employees share in future upside while preserving existing shareholders’ interests.
Key advantages:
- Aligns incentives: Staff benefit only once value is created above today’s unrestricted market value.
- Flexible hurdles and vesting conditions: You can set performance targets or time-based vesting schedules with a minimum length of employment.
- Favourable tax treatment: Often treated as capital gains rather than income tax (when structured correctly), potentially qualifying for Business Asset Disposal Relief.
Things to consider:
- Defining clear valuation hurdles, exercise price, and vesting schedules can be complex.
- Requires shareholder agreement and potential Articles of Association amendments.
Our support:
- Drafting shareholder and option agreements.
- Advising on valuation mechanics, hurdle-setting, and corporation tax deductions.
- Structuring for optimal Capital Gains Tax treatment and minimising tax liability.
Unapproved Share Option Schemes
What they are:
Unapproved options are non tax advantaged options that aren’t subject to EMI rules. You can grant any number of options over any class of shares to selected employees, directors, non employees, or non UK employees.
Key advantages:
- No upfront limits: Issue options above EMI’s 250-employee or £30 million asset cap, suitable for more mature companies.
- Customisable terms: Choose strike price, vesting conditions, and exercise windows to suit your needs.
Things to consider:
- Income tax and National Insurance Contributions (NICs) on exercise: The difference between current market value and exercise price is taxable as earnings, with employer’s NIC potentially due if shares are readily convertible assets.
- No tax relief at grant: Unlike EMI options, there’s no upfront income tax advantage for employees or option holders.
Our support:
- Calculating tax implications at exercise and employer’s NIC liabilities.
- Drafting comprehensive option agreements and managing option pools.
- Running downside risk scenarios and cash-flow planning.
Cash-Based Bonus or Profit-Sharing Plans
What they are:
A purely cash incentive tied to company performance—either a discretionary bonus pool or structured profit-sharing.
Key advantages:
- Simplicity: No share-plan documentation, valuations, or equity dilution.
- Immediate reward: Aligns short-term goals with clear cash payouts.
- Flexibility: Easily adjusted year-to-year based on financial performance.
Things to consider:
- No equity upside: Employees don’t share long-term capital growth or business asset disposal relief benefits.
- Budget impact: Must reserve cash within company forecasts and pay income tax on bonuses.
Our support:
- Designing bonus formulas aligned with KPIs.
- Forecasting cash-flow impact.
- Advising on PAYE, employer’s NIC, and employee’s NIC treatment and net-of-tax structuring.
Choosing the Right Incentive for Your Team
Deciding between growth shares, unapproved options, or cash-based rewards depends on your company’s size, growth stage, and long-term objectives. Plus Accounting’s share-plan specialists will:
- Evaluate your business structure and future fundraising plans.
- Model tax and cash scenarios under each option, considering corporation tax implications and tax liabilities.
- Draft and implement the legal and tax documentation.
- Educate your employees and option holders so they understand their rewards, vesting conditions, exercise price, and tax obligations.
Let’s find the best way to reward your people.
Contact us today for a tailored consultation on alternative share and bonus plans and empower your team to grow your business together.