Tax-Efficient Ways to Reward Employees: EMI Schemes, Growth Shares, MOBs, and EOTs Explained

Keeping your key employees happy, motivated, and loyal is essential for the long-term success of your business.

But how can you do this in a thought-through and tax-efficient way? Thankfully, there are several tax-efficient ways to reward employees that don’t just benefit the employee but also give you, the employer, the added bonus of employees feeling more invested in and engaged with the company’s future growth. 🎯

When employees have a financial stake in the business, they’re more likely to stay with you for the long haul, feel rewarded for their contributions, and be motivated to help the company grow.

Let’s explore four of our favourite tax-efficient ways to reward employees and retain your top talent: EMI schemes, growth shares, Management Buy-Outs (MBOs), and Employee Ownership Trusts (EOTs). Of course, it’s important to remember that before implementing any of these schemes, you should seek legal and tax advice, and have a robust shareholder agreement in place to protect all parties involved. 👍

Tax-efficient Ways to Reward Employees

What is an EMI Scheme, and Why Should You Use It?

If you’re a small business, one of the best ways to reward and retain key staff is through an EMI (Enterprise Management Incentive) scheme. This tax-advantaged option allows you to offer your employees the chance to buy shares in your company at a fixed price. The key benefit? The employee can buy the share for the value at the time the option was issued, even if that value has increased significantly by the time they actually buy the share. Employees don’t have to pay tax when they’re granted the option or even when they acquire the shares —only when they sell their shares, which is a big tax saving compared to other forms of remuneration.

For your business, it’s a win-win. You get to offer a significant incentive that ties the employee’s financial success to the company’s growth, boosting motivation and retention. Employees who are invested in the company’s future are far more likely to stay and play an active role in driving growth.

Pro tip: You must meet specific criteria to qualify for an EMI scheme, including a company valuation cap and a limited number of employees (fewer than 250 full-time employees). For more detailed eligibility requirements, check out HMRC’s guidance on EMI schemes.

How Do Growth Shares Work?

Growth shares offer another tax-effective method to incentivise employees but with a slightly different twist. These shares typically have a lower initial value because they only reward growth above a set benchmark. For example, employees can only benefit if the company increases in value beyond a certain point—making it more appealing for startups or businesses on the cusp of scaling. 🌱

The advantage for your employees? They get to benefit from the company’s future success without the upfront tax costs. As the employer, you retain control over the company and only share the wealth when it’s generated beyond your chosen target. This method helps “lock in” key employees by tying their rewards to the company’s growth, aligning their interests with yours.

What is an MBO (Management Buy-Out)?

A Management Buy-Out (MBO) might sound complicated, but it’s actually relatively straightforward. This is when key employees are offered the chance to buy the company (or a significant part of it) from the existing owner.

It’s often used when the owner is looking to retire or exit the business but wants the company to stay in trusted hands.

From a tax perspective, MBOs can be quite efficient. The management team usually forms a new company to buy the shares, often backed by loans and even using some of the cash in the business, which can have tax advantages.

For employees, becoming part-owners of the business they work for can be a powerful motivator, giving them a greater sense of ownership and commitment to the business’s future success.

What is an EOT (Employee Ownership Trust)?

Finally, there’s the Employee Ownership Trust (EOT), a fantastic option if you’re thinking about passing your business to employees in a structured way.

The EOT is a trust that holds a controlling interest in the company on behalf of employees. If you sell at least 51% of your business to an EOT, you don’t have to pay Capital Gains Tax—yes, you read that right!

For your employees, being part of an EOT means they indirectly own part of the company without having to purchase shares themselves. This type of ownership structure could be particularly beneficial for businesses that want to reward employees while maintaining long-term stability.

Again, it’s crucial to get sound legal and tax advice when setting up an EOT to ensure everything is set up correctly.

Which Option is Right for Your Business?

Each of these options—EMI schemes, growth shares, MBOs, and EOTs—comes with unique benefits, but the right choice depends on your business’s specific circumstances. If you’re a small company looking for a simple, tax-efficient way to reward employees, an EMI scheme or growth shares might be your best bet. If you’re planning for an exit or transition, MBOs or EOTs could be the way forward.

For all of these options, having an internal communication strategy is just as important as getting the details of the execution right – otherwise, you may invest a great deal of time and money preparing the details of a transaction which is either not understood or, worse, less well received that you would wish!

Just remember, whichever option you choose, make sure you have solid legal advice, a robust shareholder agreement, and the necessary tax advice to ensure everything runs smoothly.

Please contact Paul Brown at IN Accountancy if you would like to explore any of these options in more detail.

In summary, rewarding and retaining key employees doesn’t have to be a headache or a drain on your finances. With tax-efficient tools like EMI schemes, growth shares, MBOs, and EOTs, you can keep your top talent motivated and invested in your business’s success—while also benefiting from significant tax savings. Even better, employees are more likely to feel locked into the future of the business and rewarded for their role in its growth.

To learn more about tax-efficient ways to reward employees with incentives, visit HMRC’s guidance on Tax and Employee Share Schemes

** All details correct at time of publishing 30/9/2024

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