How to Implement a Successful Employee Share Scheme in a UK SME?

An Employee Share Scheme (ESS) can be a powerful tool for small and medium-sized enterprises (SMEs) in the UK. By providing employees with a share in the company, you not only incentivise them to strive for the company’s success but also build a sense of ownership and loyalty. However, the implementation of such a scheme can be a complex process, involving legal, tax, and business considerations. This article will guide you through the crucial steps and considerations involved in successfully implementing an employee share scheme in a UK SME.

Understanding the Concept of Employee Share Schemes

The first thing to do when considering an employee share scheme is to understand the concept itself. An ESS, also known as share options or equity incentive plans, is a strategy where employees gain part ownership of the company they work for. This is usually achieved by the company granting shares or options to buy shares at a discounted price to its employees.

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Employee share schemes can be a win-win situation for both the company and its employees. For the employees, it presents an opportunity to have a direct stake in the company’s success and potentially reap financial rewards if the company performs well. For the company, it can help to attract, reward and retain talented employees, in addition to aligning the interests of employees with that of the shareholders.

However, it is important to note that implementing an ESS requires careful planning and consideration of various factors, including the company’s financial position, corporate goals, and legal obligations.

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Choosing the Right ESS for Your Business

There are several types of ESS to choose from, each with its own set of tax implications, legal requirements, and benefits. The most common types of schemes in the UK include the Enterprise Management Incentive (EMI), Company Share Option Plan (CSOP), Save As You Earn (SAYE), and Share Incentive Plan (SIP).

The EMI is a particularly popular option for SMEs. It is a tax-advantaged scheme that offers significant income tax and National Insurance Contribution (NIC) advantages for both the company and the employees. However, to qualify for an EMI scheme, certain conditions must be met, including that the company must have gross assets of £30m or less and be an independent trading company.

Another option is the CSOP, which allows companies to grant options to employees to buy shares at a fixed price. However, the tax advantages of a CSOP are less generous than those of an EMI.

Choosing the right scheme will require a careful analysis of your business needs, financial capabilities, and the desires of your employees. It is always recommended to seek professional advice during this decision-making process.

Legal Considerations of an ESS

Implementing an ESS also involves a host of legal considerations. An ESS is a contract between the company and its employees, and as such, it must comply with the relevant laws and regulations.

It is necessary to draft a comprehensive scheme agreement that outlines the terms and conditions of the scheme, including the process for issuing and transferring shares, the rights of the employees, and the circumstances under which the scheme may be terminated.

Moreover, you must ensure that your ESS complies with all relevant laws, including the Companies Act 2006, the Financial Services and Markets Act 2000, and the rules set out by the Financial Conduct Authority (FCA). Non-compliance with these laws can result in significant penalties.

Additionally, your ESS must be registered with HM Revenue and Customs (HMRC) and meet certain reporting requirements.

Tax Implications of an Employee Share Scheme

Another major consideration when implementing an ESS is the potential tax implications for both the company and the employees.

On the company’s side, there can be corporation tax implications. If the company grants options at a discount or gives shares for free, this can be treated as a deductible expense for corporation tax purposes.

For employees, the tax treatment of an ESS depends on the type of scheme and the specific circumstances. For example, under an EMI scheme, there is generally no tax to pay when the option is granted or exercised. Instead, the employee will usually only have to pay Capital Gains Tax when they sell the shares.

However, the tax implications of an ESS are complex and can be subject to changes in tax law. Therefore, it is recommended that you seek professional tax advice when setting up an ESS.

Communicating the Scheme to Your Employees

Once you have chosen the right ESS for your business, considered all legal and tax implications, and drafted a comprehensive scheme agreement, the final step is to communicate the scheme to your employees.

Effective communication is key to ensure that your employees understand the benefits, terms, and conditions of the scheme. This can be achieved through employee briefings, written materials, and one-on-one consultations.

Remember, an ESS is not just about the financial benefits for employees. It’s also a tool for building a more engaged and motivated workforce. Your communication strategy should therefore underline this aspect as well, emphasising that the ESS is a reflection of the company’s commitment to sharing its success with its employees.

Ensuring Compliance with Employment Law

When implementing an employee share scheme, it is crucial to consider employment law. There are specific regulations around share schemes in the workplace, and non-compliance can lead to serious consequences.

In the UK, the two main pieces of legislation governing employee share schemes are the Employment Rights Act 1996 and the Companies Act 2006. These laws set out the rights and obligations of both employers and employees in relation to share schemes.

Under the Employment Rights Act, employees have a right to be provided with a written statement of the particulars of their employment, including any terms and conditions relating to share schemes. This statement must be provided within two months of the start of their employment.

In addition, the Companies Act 2006 requires companies to keep a register of members, which includes details of all shareholders and the number of shares held by each shareholder. This includes employees who have been granted shares under an ESS.

It is also important to note that if you are offering shares to employees, you must comply with the rules on share issues set out in the Companies Act. For instance, shares cannot be issued at a discount unless authorised by the company’s articles of association.

Finally, implementing an ESS may also have implications under the Equality Act 2010. Employers must ensure that the scheme does not discriminate against certain employees on the grounds of age, sex, race, disability, religion or belief, sexual orientation or gender reassignment.

Intellectual Property and Growth Shares in an ESS

When planning your ESS, it’s crucial to consider the impact on Intellectual Property (IP) and the potential for Growth Shares.

Firstly, consider how the share scheme might impact the company’s IP. For example, if employees are granted shares in the company, they may gain rights to the company’s IP. This could be a significant issue if an employee were to leave the company and potentially compete against it. To mitigate this risk, many companies include clauses in their share scheme agreements that protect the company’s IP.

Secondly, consider the potential for Growth Shares in your ESS. Growth Shares are a type of share that only provide value to the holder if the company grows in value above a certain level. They can be an attractive option in an ESS as they can provide a significant financial incentive for employees to drive the growth of the company.

However, the use of Growth Shares in an ESS can be complex and may require additional legal advice. For instance, it needs to be carefully structured to ensure that it meets the requirements of HMRC and that the growth hurdle is set at an appropriate level.


In conclusion, implementing a successful employee share scheme in a UK SME requires careful planning, consideration of various legal and tax implications, and effective communication with your employees. It can be a powerful tool to incentivise employees and align their interests with those of the company.

However, it is not a decision to be taken lightly. From understanding the concept of share schemes to choosing the right one for your business, considering employment law and the impact on intellectual property, and finally, to communicating the scheme to your employees, each step requires consideration and professional advice.

Ultimately, a well-implemented ESS can foster a sense of ownership and loyalty among your employees, driving them to contribute more effectively towards the success of the company. Consult with professionals to ensure your scheme is designed and implemented in the best way possible for your business. Remember, the success of your share scheme is also the success of your company.