It has become more expensive to pay people and we've got more people being dragged into higher rates of income tax, as well as having higher national insurance.
Indeed, as National Insurance (NI) contributions rise, many UK businesses are being forced to rethink how they reward and retain talent.
With employers and employees alike feeling the pinch, traditional salary increases are becoming less cost-effective—and in some cases, unsustainable.
In this climate, share schemes are emerging as an attractive alternative employee benefit that can deliver real value without the same upfront cost burden, as Jeremy Glover, partner and expert in employee benefits, explores.
National Insurance: What's changed?
The UK government recently implemented increases to National Insurance contributions to help fund health and social care.
While these changes may be necessary, they've also increased the total cost of employment for businesses and reduced net take-home pay for employees.
Employers are now faced with higher overheads, especially those that continue to rely heavily on pay rises in order to reward staff.
Why share schemes make sense now
We are likely to see several unintended consequences of the NI increases, including some companies choosing to increase their use of approved share schemes.
Share schemes offer a flexible, tax-efficient alternative to pay rises, and can help futureproof your talent strategy in a challenging economic climate.
Schemes such as EMI (Enterprise Management Incentives), SIPs (Share Incentive Plans), or CSOPs (Company Share Option Plans)—allow companies to offer equity or equity-linked rewards to employees.
They effectively allow businesses to offer lower tax rates for their employees, whilst being far cheaper to provide for the company, because they often don't attract employer NICs, or the employer NICs can be passed to the employee.
Not only this, companies that are owned by Employee Ownership Trusts (EOTs), can pay out tax-free bonuses, although these are still subject to NICs.
A tax efficient alternative
Many share schemes are designed to be tax-advantaged. For example, EMI schemes allow employees to purchase shares at a fixed price with minimal income tax or NI liabilities, provided certain conditions are met.
This can significantly reduce the tax burden for both employer and employee compared to standard salary increases or bonuses.
Better alignment with long-term goals
Share schemes naturally align employee interests with business performance. When staff hold a stake in the company, they're more likely to be engaged and focused on long-term success, driving productivity and retention.
Cost containment for employers
Issuing equity can help manage immediate cash flow, which is especially important when labour costs are rising so much due to the NI increases which have now taken effect. Share schemes let companies reward top performers without necessarily increasing salary bills in the short term.
Retention and recruitment tool
In a competitive market, offering equity can be a compelling benefit that helps attract and retain talent—particularly in start-ups and high-growth SMEs where salary budgets may be tighter.
Be sure to tailor the right scheme for your business
Choosing the right type of share scheme for your business depends on several factors, from company size and structure, to your long-term goals.
For example:
- EMI schemes are ideal for fast-growing SMEs and offer generous tax advantages.
- SIPs work well for companies wanting to promote broad employee ownership.
- CSOPs are suitable for more mature businesses looking to incentivise senior staff.
Seek professional advice
With National Insurance increases squeezing both margins and morale, now is the time for businesses to get creative with their reward strategies.
We expect to see employee benefits evolve as a result of NI rises, as businesses are forced to get more creative as they seek to attract and retain the best talent.
But it is important to make sure you get professional advice—both to ensure compliance with HMRC rules, and to design a scheme that's attractive and meaningful to your employees.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
