As inflation rises and the cost of living crisis bites, accountancy firms could consider alternatives to pay rises with share schemes as one option

There are three options that could potentially help employers and employees alike:

1.           Consider enterprise management incentives (EMI)

Employees are granted options to acquire shares at a point in the future (such as a sale of the company) at a price which is based on the market value of the shares when the options are granted.

Provided the employee pays at least that price to acquire the shares when the options are exercised, there are no income tax or National Insurance charges on exercise and any increase in value is chargeable to capital gains tax rather than income tax when the shares are disposed of (potentially at a 10% rate).

From the employee’s perspective they are gaining a stake in the company and can acquire shares at a low price with a cashflow advantage in that they only pay for the shares when the options are exercised.

If the options are granted on the occasion of a sale of the company, the employee will have the funds to pay for the shares plus any increase in value. If the value of the shares decreases, the employee would not exercise the option.

From the employer’s perspective, they are providing an incentive to the employees with no immediate dilution of voting power or control and the company also benefits from a corporation tax deduction when the options are exercised.

There are other share option arrangements available which might be more suitable for larger companies.

2.           Look into a phantom share scheme

This is a cash bonus scheme, but the payment is linked to the value of the company’s shares. The employee only gets the bonus if the value of the company grows and the employer has a cashflow advantage.

3.           Explore salary sacrifice arrangements

This is an agreement to reduce an employee’s entitlement to pay, generally in exchange for a non-cash benefit, for example, pension contributions. The employee is taxed on less salary (and pays lower National Insurance contributions) and the employer should save on national insurance contributions. The employer might agree to share their NI savings with the employee as a sweetener.

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