Equity-based rewards are one of the key ways that listed companies can attract, retain and motivate senior leaders and employees. But designing and operating share plans within a public market setting brings additional regulatory, tax and governance complexities. What are the equity incentive arrangements most commonly used by UK‑listed businesses and how do you ensure they remain compliant, competitive and tax‑efficient?
Most listed companies operate at least two different types of share-based plan: one exclusively for directors and an employee-based plan. Implementing such plans in a listed environment requires careful regard of all regulatory and corporate governance obligations.
Long Term Incentive Plans (LTIPs)
LTIPs are commonplace and frequently put in place for senior executives including Board members. As the name indicates, they provide incentives over a long period, usually more than one year and can take various forms including shares (deferred, options, restricted, convertible), cash or other commodities.
Typically, shares are delivered at the end of the performance period and once the performance criteria are met, without the employee needing to pay a strike price to receive the shares.
Tax considerations
Broadly speaking, a liability to payroll taxes will arise at the time when the beneficial entitlement to the shares passes, calculated by reference to the market value at that time, less any amount paid for the shares. Any tax charge will be to Pay As You Earn (PAYE) and National Insurance Contributions (NICs) and a sale should then attract Capital Gains Tax (CGT). The timing of the tax charge can be impacted by restrictions, vesting and any tax elections which may be signed. Due to their variability, the taxation of LTIPs can be a complex! But HMRC provides a number of tax favourable share plans, which can reduce the exposure to PAYE and NIC and providing greater value exposed to CGT. What are the pros and cons?
Enterprise Management Incentive (EMI)
The most flexible and tax favourable share plan, EMI is particularly favoured by companies on AIM or Aquis due to the size criteria.
- From 6 April 2026, the gross asset limit for qualifying companies and groups, increased to £120 million (from £30 million) and the employee headcount limit to 500, which makes it easier for smaller Main Market listed companies to qualify
- The £250,000 worth of shares can be granted to each employee and the total value of options that can be granted under an EMI scheme is £6m from the same date
- By structuring EMI options as nil-cost options, provided that the qualifying conditions are met, there would be a PAYE/NIC charge on exercise based on the value at grant
- A tax free exercise can be achieved if the strike price is equal to or greater than the value at grant
- EMI also attracts a relaxation in the ability to access Business Asset Disposal Relief (BADR).
Company Share Option Plan (CSOP)
Often considered the younger sibling of EMI, CSOPs differ in a number of key ways: there is no limit on company size, headcount, or asset value. Listed companies on any recognised exchange can operate a CSOP as a standalone or alongside other option plans.
- From 6 April 2023, an employee can be granted options over shares with a maximum market value of £60,000 and the option exercise price must be at least the market value of the shares on the date of grant
- No PAYE/NIC is payable on the exercise of options, provided they are exercised not less than three years after the grant date
- Unlike EMI, there is no favourable BADR position, and
- Normal CGT rules apply on an exit.
Share Incentive Plan (SIP)
A tax favourable all-employee plan that allows different types of shares to operate within the plan and, provided they are held for at least five years, a tax efficient position can be obtained. These plans are commonly seen in listed companies with a large number of employees.
If the shares are held for more than five years, they are free of CGT on a sale. But the limits under SIP are much lower than EMI and CSOP:
- Free shares – up to £3,600 per tax year
- Partnership shares can be bought from pre-tax salary of up to £1,800 or if lower, 10% of salary
- Two free matching shares can be offered for each partnership share
- Dividends received on SIP shares can be reinvested into further shares with no reinvestment limit.
Save As You Earn (SAYE)
Another scheme typically found in large, listed companies or their subsidiaries to allow employees to buy shares at a fixed price with up to a 20% discount.
The options permit the shares to be bought after three to five years, and employees enter into a savings arrangement for the same period as the option term, with monthly savings made from post-tax salary, which are then used to fund the exercise price.
- When an option is exercised, the shares are acquired free of Income Tax and NICs
- Employees can make monthly savings of between £5 and £500
- On the sale of the shares, the difference between the market value of the shares on sale and the exercise price is potentially liable to CGT.
Employee Benefit Trusts (EBTs)
Discretionary trusts setup for the benefit of employees by an employer can be widely used in a listed company environment. The key benefit is to warehouse shares that the company wants to use for incentivisation without causing further dilution.
EBTs have in the past attracted negative press due to their involvement in avoidance schemes. However, if operated correctly, they can still provide a valuable warehousing function, although there is a raft of anti-avoidance legislation to ensure compliance. They do add an additional level of complexity to any share plan and so, it is important to seek adequate tax and legal advice prior to the implementation of any share plan to ensure full awareness of the tax implications.
How we can help
If you are considering implementing or reviewing an equity incentive arrangement within your listed company, our specialist tax team can help you navigate the regulatory and tax landscape. Please contact our Head of Tax, Catherine Heyes, if you have any questions.
