Business Planning

Company share schemes: a short guide

By April 14, 2022 No Comments

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.

Have you been offered shares in your employer’s business? Employee share schemes can be attractive to prospective staff. After all, they are presented as an opportunity to share in the company’s profits. Yet how do these schemes work, exactly? Are they always a good idea to sign up to? Below, our financial planning team offers some reflections on these key questions.


What is a company share scheme?

Many UK companies cannot offer an employee share scheme (ESS) due to their structure. For instance, sole traders (by their nature) are prohibited due to having no shareholders. Others may adopt a limited liability company structure, but all of the shares are concentrated in one (or a few) owners/directors. Some, however, allow employees to be shareholders. John Lewis is a famous example in the UK, comprising nearly 200,000 “employee owners”.

There are different types of employee share schemes, however. When you are offered a new job with a scheme, therefore, it is important to grasp which type it is. In the UK, there are five main types to be aware of:

  • Save as you earn (SAYE). Employees are given the option to contribute to the scheme every month for 3-5 years. Afterwards, the pot is used for share purchase.
  • Company share option plan (CSOP). All (or specific) employees are invited to buy share options (i.e. the right to buy a certain number of company shares at a fixed price).
  • Share incentive plan (SIP). Every employee is invited to buy shares, or is given some. The employer then matches the contributions.
  • Employee ownership trust (EOT). A trust (owned by the company) awards bonuses to employees in the form of shares.
  • Enterprise management incentive (EMI). Employees of a small-to-medium sized business (SME) are invested to buy share options.


Benefits & drawbacks to ESS

For employers, an employee share scheme can be an effective way to attract new talent to the business. Startups, in particular, can offer a lot of growth potential in their initial years and so share values could rise quite considerably (allowing employers to potentially sell them later at an impressive profit). As such, ESS can also help to motivate staff to work hard for the company to succeed – incentivising effective employees to stay (who may not be prepared to relinquish their shares just yet). For employers who are philosophically inclined to share the rewards of a business’s success with workers, ESS – simply in principle – can also be very attractive.

ESS can also be a very tax-efficient way to distribute rewards to employees. For staff, being a shareholder may also entitle you to dividends when the company makes a profit (e.g. once per year). If this happens, it can be highly tax-efficient for you also – since you can earn up to £2,000 in dividends each financial year, tax-free.

However, employers and employees need to also consider the drawbacks of ESS very carefully. In particular, not-for-profit organisations cannot offer much financial incentive to employees via ESS. Rather, the benefits may be more intangible – giving staff a sense of having a say in the way that things are run. Also, employees should check whether owning shares involves gaining voting rights. Typically, this is not the case and so you need to think carefully about how you will communicate with management on important matters (e.g. employee benefits). 

Finally, workers still need to consider the tax implications of engaging with an ESS. In particular, a Company Share Option Plan (CSOP) lets you purchase up to £30,000 worth of shares at a fixed price. However, whilst you do not pay Income Tax or National Insurance contributions on the difference between the purchase price and their value, you may still have to pay Capital Gains Tax (CGT) if you sell your shares later at a profit.


Financial planning implications

In principle, there is nothing inherently wrong with an ESS from a financial planning perspective. As mentioned, attractive benefits can be on offer for all parties involved (in the right conditions). Nonetheless, employees in particular need to bear in mind that share values can go down – as well as up. Startups can appear exciting for a job opportunity due to the possibilities for growth and transformation that you can be involved with. However, startups also carry a lot of business risk due to their unproven track record and lack of profitability. For staff, therefore, the risk of job loss (due to business failure) may be higher.

There is also a diversification risk for those offered membership in an ESS. In particular, some workers can be tempted to rely too heavily on the value of their employer’s shares to fund their eventual retirement. However, if the shares fall dramatically leading up to the retirement date, this could disproportionately undermine your retirement plans. Instead, it is often wiser to build up more long-term investments within a pension (or other tax-efficient “wrapper” like an ISA). Here, you can spread your capital across multiple asset classes, markets and funds to mitigate the risks associated with any particular one. 



If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire. 

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