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Employee-owned businesses and tax incentives

The Government is increasing the number of tax incentives associated with employee share schemes in a bid to boost the number of John Lewis-style, employee-owned businesses in the UK. The independent Nuttall Review in 2012 concluded that companies operating in this model are more resilient during economic downturns, have a faster job creation rate and higher levels of commitment from staff. We look at some of the existing options available and two potential new reliefs currently under consultation.

Existing reliefs

  • Share incentive plans (SIPs) – company shares offered by the employer that offer capital gains tax and national insurance contributions (NICs) reliefs. An employer can offer up to £3,000 of free shares in any tax year
  • Partnership shares – allows employees to buy shares out of their pre-tax and NICs salary – up to £1,500 in any tax year, or 10 per cent of their overall salary, whichever is less
  • Company share option plans – allows the purchase of up to £30,000 worth of shares at a fixed price, free of income tax and NICs on the difference between the price paid and what the shares are actually worth.
  • Capital gains tax relief – applied when the controlling share of a business is sold into an indirect employee ownership structure, enabling entrepreneurs to sell their business to employees as opposed to external buyers
  • An income tax and NICs exemption – allowing indirectly employee-owned companies to pay their employees a certain amount per annum free of income tax and NICs. There would also be an employer NICs exemption for the company.

Future reliefs (currently under consultation)

Could your business benefit from an employee-ownership structure? Please get in touch to discuss this further.