Should you take shares or higher pay?
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices. Please note that we cannot advise on individual shares.
You have just sat down with your boss for a performance meeting. He is pleased with you and makes a surprise offer. Would you be interested in becoming a shareholder in the business? This way, you could enjoy some of the future profits as these are distributed periodically to owners (as dividends). How should you respond?
In 2023-24, such proposals are becoming more noticeable as employers fight to attract – and retain – the best talent amongst a general shortage of workers. Startup owners can be particularly attracted to the idea of a company share scheme, since they may lack the deep pockets of larger rivals but offer the prospect of high growth potential to shareholders.
Below, our Grantham financial advisers here at Castlegate explain some of the main pros and cons to consider when deliberating over a company share scheme. We hope these insights are useful. To discuss your own financial plan please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
What is a company share scheme?
In simple terms, a company share scheme allows employees to have a stake in the company they work for by owning shares. A well-known UK example is The John Lewis Partnership. Here, employees do not have propriety rights to their stake and cannot dissolve the company, but they can enjoy a share in the profits if the company performs well.
Other employers grant more benefits to workers via their company share scheme. For instance, perhaps they allow them to buy and sell their rights to others. A “share options” scheme allows workers to buy their employer’s shares at a fixed price in the future. This could allow them to purchase at a significant discount compared to non-employee shareholders.
The rules about company share schemes can get quite complex, especially regarding their treatment under UK taxes. The two main schemes that HMRC approves are the Company Share Option Plan (CSOP) and the Enterprise Management Incentives (EMI) scheme. Let’s explore these a bit more carefully below.
CSOP and EMI compared
A Company Share Option Plan (CSOP) might be offered by a larger company or listed organisation, especially since there are no limits on company size or number of employees (unlike the EMI, discussed shortly). In 2023-24, an employee can be granted up to £60,000 of options (£30,000 if granted before 6 April 2023). Assuming the options of dividend shares are held for at least three years, no income tax will be due on any gain made by the individual after selling.
Enterprise Management Incentives (EMI) are popular with private companies, granting options over shares with a value of up to £250,000 per employee. Here, certain qualifying conditions must be met such as the company having fewer than 250 employees and gross assets under £30 million. An employee must not own more than 30% of the share capital to be granted EMI options. Options must also be exercised within 10 years.
Should I take shares in my organisation?
A good starting point is to ask yourself what your financial priorities and preferences are. Do you get excited by the idea of sharing in the company’s profits? Or, would you rather have the stability of a regular (and hopefully rising) salary?
Another key question is how likely is the company to achieve its growth goals. Whilst your boss may be convinced of the organisation’s prospects, they are hardly likely to say if the business is in financial trouble. You may need to do some quiet independent research (e.g. using information from Companies House) to get a clearer picture of the company’s financial situation and future potential.
As mentioned, share schemes are typically preferred by startups who hope that these will encourage employees to care more about the success of the business (since they feel a sense of ownership) and work harder. If the company grows quickly then options can “vest” over time, potentially aiding the retention of staff.
Should the startup succeed in its growth goals, workers could also enjoy a significant increase in the value of their shares. Assuming the scheme meets qualifying conditions from HMRC and is “approved”, an employee’s shares could also be free from income tax and National Insurance (e.g. under a Share Incentive Plan if the shares are kept within the plan for at least five years).
Conversely, a company share scheme could lead to certain workers staying longer in the organisation than they want to (e.g. those waiting to sell shares at a profit and/or tax advantage but who are no longer motivated to work). There is also the risk that the company fails to achieve its growth targets and the employee’s shares decline in value below the original purchase price – possibly becoming worthless if the company fails.
Invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
