On 6 April 2025, employers will be faced with two changes to the National Insurance contributions (NICs) regime. Alongside an increase in the main rate of employers’ NICs from 13.8% to 15%, the salary threshold at which employers start paying NICs will be reduced to £5,000.
Traditional methods of rewarding and retaining key employees – cash bonuses – will become more expensive for employers. As an alternative, employers should consider offering their most important employees a tax-advantaged share option that would help save NICs and align employees’ rewards with their company’s success.
Background
Share option schemes are used by companies of all sizes to reward performance, retain staff and remunerate employees, often in place of cash bonuses. They are incredibly useful tools in motivating key individuals to work towards achieving key milestones and give the employees a stake in the overall performance of their employer.
Typically, when employees receive their shares under share options, they will be subject to income tax, and they often attract NICs too. Whilst it is possible to pass on the cost of the employer’s NICs to the employee, it’s not terribly motivational. However, structured right, the rewards will not be subject to income tax or NICs at all. This enables the triple upside of:
- aligning the company’s success with that of your employees;
- delivering a tax-free reward (if structured correctly);
- preventing the increased cost of employers’ NICs from hitting your cash and P&L account.
Of all of the incentive structures and schemes that we design and put in place for clients – and there are many – Enterprise Management Incentive (EMI) and Company Share Option Plan (CSOP) schemes are by far the most popular. For those new to these schemes, we set out a brief summary of how they work and the points that need to be considered when looking into whether they could work for you and your business.
EMI option schemes
As tax-advantaged share schemes go, EMI schemes are relatively flexible. Whilst strict conditions have to be met by the company, the employee and the option itself, if they are properly structured these schemes can allow employees to receive shares and realise the increase in their value without triggering income tax or NICs liabilities.
Some of the key requirements that must be met for options to be granted over the shares of a company:
- the company cannot be controlled by another company, or another company and persons connected with another company;
- the gross assets of the company (or, if it is the parent of a group, the group as a whole) must not exceed £30m at the time of grant;
- the company must have fewer than the equivalent of 250 full-time employees at the time of grant;
- the company must be a trading company, or the parent company of a trading group, and must carry on a qualifying trade;
- there are strict limits on the overall value of shares which can be placed under EMI options granted to each employee (£250,000), and by the company as a whole (£3m), but those are measured when the options are granted and do not take into account the future growth in value of the shares; and
- participants must be required to work at least 25 hours per week or, if less, 75% of their overall working time on the business to the company or its group (the “Working Time Requirement”).
Provided these and various other conditions are met, and the exercise or ‘strike’ price under the options is set at the market value of the shares when the option is granted, no income tax or NICs will be due when an employee exercises their EMI option and buys the shares.
There are some caveats to this generous tax treatment. If a ‘disqualifying event’ occurs before the employee exercises their EMI option, the option will normally lose its tax-advantaged status from that point onwards. Disqualifying events include the following:
- the company whose shares are under option becoming a subsidiary of another company;
- the company ceasing to meet the trading activities requirements; and
- the employee ceasing to meet the Working Time Requirement in relation to the company or its group.
So, whilst the EMI legislation contains strict conditions which have to be met in order for options to qualify as tax advantaged and not lose that status before the employee buys their shares, if they are structured properly then the value which the employee receives when they buy their shares would be free of NICs.
CSOPs
Where a company cannot grant EMI options – for example, because they do not carry out a “qualifying trade” – CSOP options could be the next best thing. Here are some of the key conditions that have to be borne in mind when considering whether to adopt a CSOP scheme:
- the shares under option must be in a company that is free from the control of another company or listed on a recognised stock exchange (e.g. The London Stock Exchange);
- the exercise price must be at least equal to the market value of the shares under option when it is granted;
- the participants must be employees or full-time directors of the company or its group;
- the value of shares which any individual can hold CSOP options over is limited to £60,000 (not the more generous £250,000 under EMI options); and
- whilst there are some specific exceptions (for example, where there is a takeover of the company, or where the participant is a good leaver), CSOP options are only tax-advantaged if they are exercised more than three years after the date of grant.
As with EMI options, the company can choose which employees are invited to participate in the plan, but the legislation governing CSOPs is more prescriptive than the equivalent for EMI options.
Conclusion
Many companies which pay cash bonuses to their employees could benefit from restructuring those rewards as EMI or CSOP options to mitigate their employers’ NICs liabilities. These schemes present a valuable opportunity to align a company’s success with that of its employees, deliver a tax-free reward and prevent the increased cost of employers’ NICs from affecting the cash and P&L account.
If you want to find out more about whether an EMI option or CSOP share scheme would be suitable for your company, seeking specialist advice and guidance is critical.
At Gateley Legal, our tax and incentives team is experienced in helping clients in all sectors and industries by designing, structuring and implementing share and cash-based incentive structures.