Generating wealth through equity incentive schemes: A response to Pension Allowances

Posted by admin at 15:51 on 13 Feb 2017


The new limits on pension contributions and individual pension funds, of £50,000 and £1.5m respectively, are driving more senior employees to search for additional ways to accumulate wealth and save tax.

In the right circumstances, equity incentive schemes offered by the employer can play a valuable role. Normally, gains from such schemes are taxed as income and may also be subject to national insurance contributions. However there are several ways in which gains can be taken as capital at a much reduced tax rate.

Increasingly popular is the government sponsored Enterprise Management Incentive (EMI). This is a share option scheme under which employees benefit from a rise in the value of the shares. Gains are charged to capital gains tax at a maximum of 28% as opposed to the current top rate of income tax of 50% plus NICs.

The value of these schemes is being increasingly recognised by private companies, especially those seeking to build shareholder value ahead of an exit by way of trade sale or flotation. HM Revenue & Customs will accept very conservative values for private company shares. Although there is a £120,000 limit on the initial value of shares held under an EMI scheme, the eventual proceeds achieved on exit are often a large multiple of the initial agreed value.

Not all companies can offer EMIs: some may be too large, or engaged in non-qualifying activities. However there are other possibilities. One, the Deferred Share Purchase Plan (DSPP), involves the employee purchasing shares in the employer but paying only a nominal amount initially. The balance is normally payable on achievement of the exit, and the profits realised. Again, these are capital gains not income. The unpaid balance may be treated as a notional loan for tax purposes, giving rise to a small annual charge, but this is normally waived for directors of small companies. If a participant acquires 5% or more of the voting shares through a DSPP they may be entitled to Entrepreneurs' Relief on sale, resulting in a tax rate of just 10% on the gains.

These are just some of the many opportunities afforded by equity based incentives to build wealth and save tax. Blacktower Financial Advisers are specialists in Pension Planning and work with the RM2 Partnership. For further details, regarding Pension Limits, please contact Chris Bruce, Managing Director of Blacktower. If you wish to discuss anything relating to employee share schemes, please call us on 020 8949 5522 and ask to speak to an adviser.