It can be difficult to establish satisfactory incentives that are will impact retention within your firm.
Many firms will struggle to choose incentives that will be right for their employees and will have the desired effect.
The incentives offered ultimately need to motivate individuals but also be a reward for performance. These incentives shouldn’t be too complex as employees should be able to understand what they are and how they will be beneficial.
Nil paid shares
Nil paid shares will involve individuals obtaining shares with the condition that they don’t pay for the purchase price immediately.
They instead will agree to pay this in the future.
Nil paid shares are beneficial as the individual will have immediate share ownership which can include dividends but they will also be subject to Capital Gains Tax (CGT) when they sell the shares, in place of Income Tax.
If an employer chose to free the employee from having to pay the purchase price, then the outstanding amount can be taxed as remuneration.
There are some consequences of an employee having partly paid shares when it comes to Income Tax.
The outstanding amount is regarded as if it were a loan from the employer which is known as a ‘notional loan’.
This then sees an annual Benefit in Kind (BIK) charge added until the outstanding amount is paid. This does not apply to an employee if the loan amount doesn’t exceed £10,000.
This share involves creating a new class of share which has a limited value when obtained.
Growth shares are only entitled to a small proportion of the growth in shareholder value which is normally linked to your firm’s performance or exit value.
Joint share ownership arrangements
These provide a similar tax efficiency as growth shares do.
If your firm don’t want to create a new class of shares then Joint share ownership arrangements (JSOP) can be considered.
They involve a joint ownership between an employee and the trustee of an employee benefit trust (EBT).
The employee is entitled to the benefit in value of the shares above a certain amount. Normally this is put at market value based on the date of acquisition.
All of the details of the JSOP are arranged through a Joint Ownership Agreement (JOA).
This sets out how an employee could share their interests in shares if they are leaving the firm, for example.
For more advice on tax efficient incentives for employees, contact us.