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The Michelmores’ incentives team talk a lot about incentives being an excellent tool in the war to retain talent. We are at it again, and this time in the context of using incentives to augment staff remuneration at a time when cost pressures are ramping up especially for smaller businesses.
The ripples of the Autumn 2024 Budget are getting ever wider as the effects of the budget announcements make themselves felt. As a quick recap, businesses are facing increases to employer’s national insurance contributions, a drop in the threshold from when national insurance contributions become payable and an increase in the national living wage. Business owners have assessed the impact of these changes: it is widely reported that those who had investment plans are shelving them as they have seen their investment war chest impacted by the increased costs; others are assessing how to navigate the increased cost pressures coming out of the budget knowing that their supply chains are likely to be increasing prices and passing on the additional costs. Add into this that retaining and attracting talent remains crucial for any ambitious business and it must surely be time to take a good look at how incentives can play a role in bridging these uncertain times.
In circumstances where salary increases may be under pressure, the offer of an incentive to share in the growth of the company either at the point of a sale or on reaching an interim, measurable target, is a way to reward and retain staff without incurring a substantial increase in the salary bill. Properly structured though, incentive schemes can achieve so much more: they form part of the “social” pillar in the ESG metric focussing on workplace culture and business sustainability (read more here); incentives are also a way to engage and remain engaged with employees both in the world of flexible working and in making employees feel valued in circumstances where it may not be possible to reflect this in the pay packet.
There are a number of incentive schemes available to employers, some more attractive from a tax point of view than others. Some are more administratively intensive than others and it is worthwhile speaking to an expert to understand the suitability of the various schemes. It is also important to strike the balance between employees feeling rewarded and incentivised whilst possibly not giving away shares in the business immediately. Structuring the scheme so that it incentivises, retains and rewards staff while at the same time benefitting the business and helping to drive growth requires planning and forethought and a conversation with a share schemes specialist before engaging with staff is time well spent.
For smaller businesses Enterprise Management Incentive (EMI) Schemes are usually the first solution to consider. The most popular of the tax-advantaged schemes, The EMI Scheme delivers flexibility within a legislative framework and, if all the requirements are met, guarantees capital treatment for employees when they sell their shares. Because the tax benefits are so advantageous, the requirements must be met for the employer to qualify to grant EMI options and for the employee to benefit. It is worth taking the time initially to check all the eligibility criteria.
The Company Share Option Plan is another tax advantaged scheme but lacks the flexibility of the EMI scheme due to lower thresholds for the number of options which can be granted and, to fully benefit from the tax treatment, the options cannot be exercised for three years.
There are also non-tax advantaged schemes. These schemes do not have any tax advantages to them and have no special tax regime governing them. As a result, within the bounds of company law, these options are very flexible and can be made subject to any number of conditions and requirements. Note though that where these plans are used for employees, unless the options are exercised early, most if not all of the gain made on the value of the shares will be subject to income tax and employer and employee national insurance contributions. Typically this type of scheme would only be used where the tax advantaged schemes are not available.
These are just some examples of the schemes available. The share incentives team at Michelmores will be happy to have a conversation with you about share incentives and how they can work in your business. If you require any further information, please contact Cathy Bryant or Anthony Reeves.