As a start-up, a lot of your future success depends on the talent you bring into your team early on in your business’ development. The issue is that great talent has to be motivated and rewarded, but early-stage businesses rarely have enough cash to offer an above-average salary. Luckily, there are alternative options for remuneration that can be part of your staff’s pay package. These can be tax-efficient and stay light on your cash balance.
Let’s break down a typical pay package into its components:
Salary is the obvious, more substantial part. That’s a monthly payment to your employee on which you will have to pay National Insurance, and on top of that employees must deduct their income Tax (at a rate of 20%, 40% or 45%) to obtain the effective amount that they earn.
Pension contributions are payments that you make towards your employees’ pension. These are variable and depend on the scheme you adopt, but if you decide to pay pension contributions as part of your remuneration package, you could do that tax-free.
Performance-based bonuses are extra remuneration that are awarded to your employees if they reach some agreed targets. These can be a useful tool because on the one hand it will motivate your employees to work harder, and on the other hand you will only have to pay them if they reached said target – usually meaning they have earned you some extra revenue.
Shares in your company can be given to employees as part of their pay package. You can either do this by assigning regular shares to the employees, or by giving them “share options”. Share options mean that employees have the right to buy some shares in the company in the future at an agreed-upon price. The purchase usually has to happen within some agreed conditions. A typical instance would be to offer your employees the option to purchase shares in your company at an agreed upon price in the case of an exit, so that if the company is successful your employees will make a profit, but they are not obliged to purchase the shares if the business fails.
The share options alternative is particularly interesting because it has huge potential value for your employees while not costing you any money. For example, if you grant your employees the option to purchase shares at the current market value, but in 5 years’ time, but in the same time-frame your company has grown ten-fold, your employees will make a 900% profit when purchasing those shares.
What is even more noteworthy is that under certain circumstances you can take advantage of the EMI Scheme, designed to grant share options to employees in a tax efficient way.
EMI Share Options are great for attracting and retaining key employees and management.
When set up properly, they provide equity incentives which are flexible, tax advantageous and align employees with the goals of shareholders. The company can claim corporation tax deductions and for the employee it can mean the difference between 10% and 45% tax.