Good staff are hard to find in today’s labour market. Once you’ve found talented and motivated employees, you’ll want to retain them for the long term. One way to retain staff is to issue employee share schemes.
Shares
One way of enabling employees to participate is to issue shares to the employees concerned. The advantage of this is that the interests of the shareholders, directors and employees will be more closely aligned. Furthermore, issuing shares entails relatively low costs for the company. This is because the only costs involved are those incurred by the solicitor for issuing the shares.
If it is not desirable for employees to participate in decision-making within the company, non-voting shares are an option.
Certificates
Another option for enabling employees to participate is to issue certificates to the employees concerned. The advantage of this is that control remains with the current shareholders and the certificate holders have no voting rights. Furthermore, certificates can be transferred without the need to visit a solicitor. A disadvantage, however, is that a trust must be established through a solicitor and that various documents, including the administrative conditions, must be drawn up.
Tax
Employee income tax
The acquisition of shares or share certificates under an employee share scheme has implications for the employee’s income tax liability. If the shares constitute remuneration for work performed and the employee can achieve a disproportionately high return without incurring any real risk, this may constitute a lucrative interest. In such cases, the shares/certificates are, in principle, classified in box 1 for the employee. The benefit derived from the shares/certificates is then taxed at the progressive rate in box 1. In certain circumstances, it is possible to have benefits derived from a lucrative interest taxed in box 2.
If the shares/certificates issued do not qualify as a profit-making interest, the shares will be classified under Box 2 or Box 3 for the employee.
Payroll tax
If the employee is able to purchase the shares at a lower value than their market value, or receives the shares free of charge, this constitutes remuneration in kind. The employer is required to pay payroll tax on this.
The bill Changes to the tax regime for share option rights will make it an attractive option in future to allow employees to participate via share option rights.
Are you wondering whether setting up an employee share scheme might be right for your company? If so, please feel free to contact with us.