Tax-efficient carrots

Incentivising key staff is essential for a company's success, and employee share schemes are increasingly used as part of reward packages. Not only are they tax-efficient, which is particularly relevant once National Insurance increases take effect in April, but they can be highly flexible.

Today, enterprise management incentive schemes, or EMIs, are the most tax-efficient share plans available for small and medium-sized companies. Any number of staff can join an employer's scheme and receive shares worth up to £100,000. The value of shares that a firm can issue under an EMI is capped at £3m.

EMIs are highly flexible; they can support the company's culture and aspirations, with share options geared to individual or company success. With care, they can be used to reward employees involved in joint ventures, or those working on specific projects. This makes them highly relevant to companies in the building sector, although they are not available to property developers.

The company share option plan can be used by a wider range of companies, and can provide shares options worth up to £30,000 an employee. Again, there are income tax and National Insurance advantages.

Employee share ownership trusts are another versatile option, and in their simplest form can be used as a vehicle for holding a company's own shares. They can operate alongside other plans as part of a more complex arrangement to improve tax-efficiency and flexibility for the company and its employees.

Some companies may not wish, or be unable, to offer shares; for example, if their price has not historically reflected performance, or if the owner of a private company does not wish to share control. Here, cash-based plans can be useful.

Although they do not offer tax advantages of some share-based plans, they can be equally effective in motivating staff and their simplicity and transparency makes them attractive. They can be improved with the use of with tax-advantageous employee benefit trusts. However, care is needed as the tax advantages are less attractive after the chancellor's pre-Budget report last November.