Is it time for your business to implement an employee share scheme?

Many of the businesses we work with reach a stage where traditional incentives like salaries, bonuses and workplace perks can only go so far.

When you’re building for the long term, and want to retain key people, it often makes sense to offer something more meaningful, like a stake in the business.

Employee share schemes allow businesses to offer equity to their employees under clear legal terms, often linked to performance or length of service.

Why consider a share scheme?

Employee share schemes are now a well-established part of the UK business market, with more than 20,000 companies operating at least one.

We’re seeing interest from fast-growing start-ups and scale-ups, as well as established businesses looking to strengthen employee retention and succession planning.

Here are some of the most common reasons companies choose to introduce a scheme:

• Giving employees a longer-term reason to stay, beyond annual reviews or bonus cycles.
• Offering equity can help attract top talent, especially where salary alone can’t compete.
• Encouraging employees to think like shareholders and invest in the company’s future.
• A cost-effective way to reward performance without immediate financial impact.
• While not the only consideration, many schemes offer tax advantages for both employer and employee.

That said, choosing the right scheme is not just about incentives or tax relief. It’s also a legal decision.

Each scheme has different rules, eligibility criteria and implications for corporate governance, so it’s important to seek legal advice before making a commitment.

What types of employee share schemes are available in the UK?

There are four main types of HMRC-recognised share schemes currently in use:

• Enterprise Management Incentives (EMI) – A flexible and tax-advantaged scheme aimed at smaller companies (typically with gross assets under £30 million and less than 250 full-time employees). EMI options can be tailored to individual employees and aligned with business performance or exit events.
• Company Share Option Plans (CSOP) – Suitable for larger or more established businesses, CSOPs allow companies to grant share options to employees, subject to certain limits and conditions. These must be granted at market value, and tax relief is available if specific holding periods are met.
• Save As You Earn (SAYE) – A lower-risk option where employees save monthly for three or five years and use those savings to buy shares at a discounted price. If the share price rises, they profit, if it doesn’t, they can withdraw their savings and accrued interest tax-free.
• Share Incentive Plans (SIP) – A broader-based scheme where companies can offer free shares, allow staff to purchase shares from gross salary, and even match those purchases. Shares must usually be held for at least five years to retain the full tax advantages.

To help you assess which scheme is best suited to your business, we suggest seeking professional advice.

What legal factors should you consider with employee share schemes?

While the tax treatment of employee share schemes often gets the spotlight, the legal structure behind them is just as critical and often more complex.

These schemes involve issuing equity, altering company documents and introducing new rights and responsibilities for both employer and employee.

Without the right legal framework, a well-meaning scheme can quickly become a source of confusion or even dispute.

Some of the key legal considerations include:

1. Company structure and eligibility

Not every company can implement every scheme. For example, EMI options are only available to companies with gross assets under £30 million, operating in qualifying sectors. Understanding whether your business qualifies should be the first port of call.

2. Share capital and articles of association

Before issuing new shares or granting options, you’ll need to review your share capital and check whether your articles of association permit this. In many cases, they’ll need to be amended, particularly to include rules around leavers, transfers, voting rights and share classes.

3. Shareholder and board approvals

Most schemes require formal approvals by the board and, in some cases, shareholders. These need to be carefully documented to ensure compliance and protect the company from future challenges.

4. Option agreements and scheme rules

Each participant should be issued a tailored agreement setting out how their options or shares work, including vesting conditions, exit treatment, and what happens if they leave the business. Generic documents often fail to provide the level of clarity necessary to avoid misunderstandings in the future.

5. Impact on ownership and control

Bringing employees into the cap table, even in a non-voting capacity, raises important questions about decision-making, dilution, and exit planning. These are legal issues as much as strategic ones and should be addressed early.

Get support with employee share schemes from Palmers

A well-structured scheme supports, rather than complicates, your growth.

Legal input at the planning stage can help you design something that fits your business, protects your interests and delivers the long-term benefits you’re aiming for.

If you’re exploring the idea of an employee share scheme or want to ensure your current one is fit for purpose, please get in touch with matthewjohnson@palmers.co.uk or jonathanhol@palmers.co.uk.