Employee share schemes, if structured correctly, can be an effective way of incentivising staff by linking personal reward to company growth. They are also very useful for fast growth start-up and innovative companies that want to attract top talent but lack the capital to compete on salary alone.

Recent changes to how Employee Share Schemes (ESS) are taxed make the schemes more attractive with a common sense approach to how they are taxed. Under an ESS, employers issue shares (an ownership stake) and/or options (a right to acquire shares at a later date) to their employees at a discount to the market value of the shares or rights. In general, when an employee receives shares or rights under an ESS they are taxed on the discount they have received. Under the new rules, it is now easier to defer the taxing point until it’s clear that the employee will actually derive an economic benefit from the shares or options they have received (this is possible under the old rules but in a narrower range of situations).

In addition, special rules exist for start-ups that allow relatively small discounts received by employees in relation to shares or rights not to be taxed at all under the ESS rules if the relevant conditions are met.

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