Tax efficient options for employee shareholders

Businesses with cashflow problems looking to incentivise their workforce should consider a new scheme which comes into law next week allowing companies to give their employees shares in a tax efficient way, according to analysis by Baker Tilly according to Harris & Co chartered accountants Northampton, the specialist small business accountants.

The Growth and Infrastructure Act, which received Royal Assent in April 2013, establishes a framework for a new employment status, to be known as ’employee shareholder’, which comes into effect from 1 September 2013.

The new rules allow firms with more than 250 employees to offer an employee a minimum of £2,000 worth of shares in their employer or an associated company, in return for relinquishing a defined group of employment protection rights, including the right not to be unfairly dismissed and the right to a statutory redundancy payment.

The first £2,000 of shares given to any employee who signs up, qualifies for an exemption from income tax and national insurance, while a further £48,000 can be awarded subject to income tax and national insurance.

The employee shareholder’s gains on the eventual disposal, or transfer of the shares, are generally exempt from capital gains tax, while the company enjoys a corporation tax deduction equivalent to the total value of the shares granted to the employee at the time of issue.

Martin Benson, London head of the employer consulting Group at Baker Tilly, said: ‘The launch of this new share scheme is particularly well timed now that there are signs of economic recovery. It provides a means for companies with limited cash resources to incentivise their employees now, without the need for a large cash outlay, while at the same time gaining greater flexibility to manage their workforces.’

Baker Tilly says its analysis suggests businesses most likely to be benefit include high-growth companies, or those in financial difficulty with turnaround potential.

‘There will be significant upside potential for employees participating in the scheme. Shares awarded now will likely be at low valuations and so have potential for substantial tax-free capital gains as the recovery continues,’ Benson said.