Why not give employees shares instead of an EMI option?
Shares are a long-term stake in the business giving the holder the right to receive dividends, to vote at shareholders’ meetings, and if the company is sold, to receive a proportion of the sale proceeds.
Shares are generally given to individuals after they have made cash or other contributions to the business, and shares aren’t usually an appropriate reward for someone before that.
Unlike EMI options, shares also result in tax liabilities in that income tax and National Insurance contributions (for both employees and the company) will be charged on the value of the shares. These will need to be paid by employees in relation to the tax year in which the shares are given.
Income tax will be at 40% of the share value for higher rate taxpayers (taxable income above £50,270). Additional rate taxpayers (taxable income above £125,140) will pay 45% income tax. The tax-free annual personal allowance will also be lost if the income is higher than £125,140.
Further tax will be due when shares are sold, generally at 20% on any capital gain above the annual exempt amount of £6,000 for higher and additional rate taxpayers. EMI share options have considerable tax advantages – see ‘What are the tax advantages of EMI?’
What about giving employees more money instead of an EMI option?
Giving money doesn’t give employees the opportunity to share in the growth of the company. From the company’s perspective, increasing salaries or bonuses will also hinder investment plans by immediately increasing the cash burden on the business.
Salaries and bonuses are also not tax efficient in contrast to EMI options. Higher rate taxpayers (taxable income above £50,270) pay 40% income tax and additional rate taxpayers (taxable income above £125,140) pay 45% income tax, as well as National Insurance contributions (for both employees and the company). The tax-free annual personal allowance will also be lost if the income is higher than £125,140.
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Please Note: This article contains general information only and Simply Equity is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. This article is not a substitute for professional advice and should not be used as such. Simply Equity does not assume any liability for reliance on the information provided in this article.