06/12/2011

By Inez Anderson, Head of Employment Tax and Incentives, Smith & Williamson

With the 50% income tax rate and restrictions on tax relief for pension contributions, businesses should be reviewing their pension and reward structures to ensure they are offering their executives the best possible packages.

There is a wide range of share and cash-based reward schemes which companies can choose from according to individual circumstances and it also may be worth considering the business’ corporate structure. Here we demystify JSOPs, MSPs, CFDs and LLPs – just some of the acronyms you may come across when reviewing your executive employee benefit packages.

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JSOPS and MSPs – share-based reward schemes

A joint share ownership plan (JSOP) is an employee incentive arrangement where the employee jointly acquires shares with a third party, which is usually an employee benefit trust (EBT).

Advantages:

– The gain on the employee’s share is subject to capital gains tax (CGT) at 28% (or 18% if a basic rate tax payer), as opposed to income tax at 50%

– The plan is very flexible, so can be tailored to meet specific requirements

– It can be used on a one-off or regular basis, by listed and unlisted companies, and no separate class of shares is required

Consider this plan if your company is:

– Seeking to align the employee’s interests with those of the company to ensure future growth

– Looking to incentivise key employees in the medium term

– Not specifically looking to obtain corporate tax relief

The Smith & Williamson Matching Share Plan (MSP) is an employee share incentive arrangement designed to encourage employees to take ownership of shares in the company. It can be used to increase the potential value of an employee’s award through the implementation of ‘buy one, get one free’ arrangements.

Advantages:

– It fixes the amount of income tax and national insurance contributions payable by the individual at the start of the plan, which should be minimised where specific forfeiture conditions are taken into account

– Any increase in the value of the shares is then taxed under the CGT regime

– It can be used by listed and privately held companies

Consider this plan if your company is:

– Seeking to align the employees’ interests with those of the company and other shareholders to ensure future growth of the company

– Looking to lock-in key employees in the medium term

– Seeking to provide shares to employees without the employees having to expend large sums of cash up front

HMRC-approved share option arrangements

Before considering any of the above ideas employers should look to maximise on HMRC-approved arrangements such as approved employee share option schemes as these can provide the maximum tax and national insurance advantages.

CFDs — contract for differences

A contract for difference (CFD) is a paper contract between an employer and an employee which stipulates what payment will be made between the parties and when. If at maturity the CFD has grown in value then the employer will make a payment to the employee. If it decreases below a pre-determined level the employee will pay the company.

Advantages:

– It can be linked to specific performance targets, which can be aligned to the business

– The increase in value is taxed under the CGT regime.
Consider this plan if your company is:

– Seeking to align the employees’ interests with those of the company to ensure future growth

– Looking to incentivise key employees in the medium-to-long term

LLPs — is your current corporate structure right for your business?

A limited liability partnership (LLP) is a legal entity which is separate from its members. It has the characteristics of both a limited company and a partnership. It is, however, transparent for tax purposes and each member is taxed on their share of the profits each year.

Advantages:

– Increased flexibility for incentivising and rewarding the key team

– Ability to change the profit sharing ratio — normally with no tax consequences

– Entrepreneurs’ relief — even if less than 5% holding

– Tax relief on interest on loans to LLP

– National Insurance saving for the business

Consider conversion to LLP if your company:

– Employs highly paid employees

– Is looking to bring in new senior people with a stake in the business

This article has focused on minimising the tax and national insurance costs of reward packages but it is fundamentally important that any packages implemented will support your overall business strategy.

To make sure you’ve got the best reward scheme in place for your key employees, get in touch with Inez Anderson by email on inez.anderson@smith.williamson.co.uk or call her on 020 7131 4919.

Disclaimer: By necessity, this article can only provide a short overview and it is essential to seek professional advice before applying its contents. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

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