Incentive plans for unlisted companies

Providing effective incentives to their key employees is often vital to the growth prospects of unlisted companies. Although the Government has not created a tax-advantaged share plan specifically for unlisted companies, there are many different ways that they can incentivise management and employees.

Common issues for unlisted companies

As there is generally no ‘market’ for the shares in an unlisted company, the approach to valuing the company’s shares will be vital, read more about business valuations here. Another complexity is that the unlisted company is often targeting a liquidity event - such as an initial public offering of its shares or a sale of the business. Therefore, the design of the incentive needs to take into account factors such as vesting arrangements and performance criteria or liquidity. In most cases, detailed scenario planning is required before an incentive plan is created to ensure that its impact for all of the stakeholders is positive.

The tax treatment of the incentive plan is likely to be a major concern for an unlisted company. For example, where the business has high potential growth, there is a greater opportunity to benefit from the lower capital gains tax rates compared to income tax rates.

Share plans

Enterprise Management Incentive share options (EMI, read more here) have qualifying conditions intended to target growing, entrepreneurial, early to mid-stage businesses. Such companies are often unlisted; therefore, EMI remains the simplest and most tax-advantageous scheme structure for those companies that qualify.

Where EMI is not available, the Company Share Option Plan (CSOP, read more here) is a useful alternative share option plan with many tax-advantages.  If EMI and CSOP are not available, there are several other structures that may give a more attractive tax treatment than simple non-tax advantaged share options. These include growth shares, flowering shares, joint share ownership plans and partly paid shares. All of these arrangements allow employees to acquire an interest in the company on the date of award and be subject to capital gains tax on a subsequent sale or flotation.

Where the tax treatment of an incentive plan is not a main driver, a non-tax advantaged share option or cash-based incentive plan can provide the simplicity that may be desirable for all parties.

Overall, deciding on the best incentive plan for your company requires a holistic approach taking into account many variables including the tax position of both the company and all participants.

Expert advice on Share Plans and Incentives

Despite the increase in (a) employer’s NIC to 15% (from April 2025); (b) top rate of capital gains tax to 24%; and (c) Business Asset Disposal Relief to 18% (by April 2026), share-based incentives remain an extremely attractive way to retain and incentive key employees in a tax efficient way which can be aligned with the company’s key commercial objectives.

If you have any questions about share incentives for your employees, please get in touch – our team of specialists will be happy to help you.