Employee share schemes have become an increasingly popular tool for UK businesses looking to attract, motivate, and retain their staff. With the competition for talent remaining high across many industries, offering employees a financial stake in the business can be a powerful way to reward performance, build loyalty, and align long-term goals. For employers, share schemes provide both tax-efficient options and a practical means of fostering stronger employee commitment. For employees, they present the chance to benefit directly from the company’s growth and success.
According to the Office for National Statistics, total bonus payments across the UK reached £53.4 billion in 2023, equivalent to 6.1% of total pay (ONS, 2024). While bonuses remain an important incentive, employee share schemes offer a longer-term approach that ties rewards more closely to sustained business performance. HMRC data also shows that around 16,000 UK companies operate tax-advantaged share schemes, highlighting how mainstream these options have become (HMRC, 2024).
For business owners, the potential benefits are clear. Employee share schemes can strengthen retention by encouraging staff to stay for the long term, enhance performance by linking rewards to company growth, and create a culture of shared responsibility. But schemes must be designed carefully, with compliance, tax treatment, and employee communication all taken into account.
In this blog, we’ll look at the main types of share schemes available, explore their advantages, and outline the practical considerations you should be aware of if you’re thinking about implementing one.
What are employee share schemes?
Employee share schemes are arrangements that allow staff to acquire shares or options in their employer’s company, often with favourable tax treatment. They are particularly valuable for growing businesses that want to reward and motivate employees without relying solely on cash pay.
There are two broad categories:
- Tax-advantaged share schemes: These are approved by HMRC and provide significant tax benefits to both employer and employee. Examples include EMI, CSOP, and SIP.
- Non-tax-advantaged schemes: These can be more flexible in design but don’t carry the same tax advantages.
The right choice depends on the size of your company, your goals, and the profile of your workforce.
Enterprise Management Incentives (EMI)
The EMI scheme is one of the most flexible and tax-efficient options for smaller, high-growth companies. It allows employers to grant share options up to the value of £250,000 per employee, with a company-wide limit of £3 million.
Key benefits include:
- Employees usually pay no Income Tax or National Insurance on the grant of the option.
- Gains are typically subject to Capital Gains Tax (CGT) when shares are sold, often at the lower 10% rate if Business Asset Disposal Relief applies.
- Employers can deduct the difference between the market value of shares and the option price from their Corporation Tax bill.
Not all businesses qualify – for example, companies must have gross assets of £30 million or less and fewer than 250 full-time employees. Certain industries, such as financial services, are excluded.
Company Share Option Plan (CSOP)
A CSOP allows companies to grant each employee share options worth up to £60,000. Unlike EMI, CSOPs can be used by larger businesses, as there are no restrictions on company size or sector.
Advantages include:
- No income tax or National Insurance if options are held for at least three years before being exercised.
- Gains are taxed under CGT rules rather than as income.
For companies that do not qualify for EMI, a CSOP can be a useful alternative, though the individual limits are lower.
Share Incentive Plan (SIP)
A SIP is a flexible scheme that allows companies to award free shares, match shares purchased by employees, or let staff buy shares from pre-tax salary. Shares must be held in a trust for a set period.
Benefits for employees include:
- No income tax or National Insurance on shares held in the trust for at least five years.
- Any dividends received on SIP shares can be reinvested in more shares with tax advantages.
For employers, SIPs encourage broad employee participation and can help build a culture of shared ownership across the workforce.
Why implement an employee share scheme?
Introducing a share scheme can deliver several advantages for businesses:
- Attraction and retention: Share schemes can make your business more appealing to skilled employees and reduce staff turnover.
- Performance alignment: Employees are incentivised to work towards company success, as their own financial reward depends on growth.
- Tax efficiency: Both companies and employees benefit from favourable tax treatment under HMRC-approved schemes.
- Culture: Schemes foster a sense of ownership, encouraging staff to think and act like stakeholders in the company’s future.
Given that average staff turnover rates in the UK remain around 15% annually (CIPD, 2024), finding ways to encourage loyalty is more important than ever.
Compliance and practical considerations
While the advantages are clear, implementing a scheme requires careful planning:
- Valuation: A fair and defensible share valuation must be agreed with HMRC for tax-advantaged schemes.
- Administration: Proper records, communication, and reporting are essential, including annual returns to HMRC.
- Eligibility: Not all companies or employees will qualify, depending on scheme rules.
- Communication: Employees need to understand how the scheme works, its risks, and its potential rewards.
- Exit strategy: Consider how shares or options will be treated if an employee leaves or the business is sold.
Many businesses find it helpful to work closely with professional advisers to design and implement schemes that balance compliance with flexibility.
Potential challenges
It’s important to be realistic about potential drawbacks:
- Costs: Setting up and administering a scheme can involve legal, tax, and administrative expenses.
- Dilution: Issuing new shares may dilute existing shareholders’ ownership unless carefully managed.
- Complexity: Employees may not always understand the value or risk of share options, so clear communication is key.
These challenges shouldn’t deter you – with the right planning and advice, the benefits usually outweigh the downsides.
Supporting long-term growth
Employee share schemes are about more than tax advantages – they are an investment in your team and your business. By giving employees a stake in the future, you’re encouraging them to commit to the long term and contribute more actively to company success. For many small and medium-sized businesses, this can be the difference between losing key staff and building a stable, motivated workforce.
At the same time, aligning employee rewards with business growth helps drive performance and creates a stronger culture of accountability. While no single incentive can solve every staffing challenge, share schemes are a proven and practical way to balance reward with commitment.
If you’re considering employee share schemes, we can help you choose the right option for your business and ensure it’s structured and compliant from the start. To explore how a scheme could support your goals, get in touch with us today: