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Freshfields Risk & Compliance

| 6 minutes read

Spring Budget: Equity for All – a holistic review of the UK’s share plan framework is long overdue

On 15 March, the Chancellor announced the Spring Budget for 2023. In doing so, the Budget set out that the Government will launch a call for evidence on SIP and SAYE schemes to consider opportunities to improve and simplify them. This follows a parliamentary debate on potential reforms of employee share ownership schemes in September 2022 during which questions were raised as to how to develop a new type of share scheme that would “allow the more than 4 million people who operate in the so-called gig economy to join a share plan and own a stake in the organisation they work for”.

These are undoubtedly positive developments and provide much needed impetus for reform in share plan legislation to bring it in line with (1) the nuances that have developed in recent years in respect of employer-employee relationships, and (2) the push to make the UK increasingly attractive as a hub for tech companies and start-ups.

Evolving nature of work

Traditional employer-employee relationships have evolved considerably over the past decade, with the rise of the gig economy, in particular. In response to the emergence of different types of relationships between service recipients and service providers, those with ‘worker’ status have been increasingly afforded some rights and protections akin to those traditional employees have enjoyed.

In contrast, the legislative framework surrounding share schemes lags behind, making incentivisation of non-employee workers through share schemes extremely difficult (see more here). This primarily stems from the way in which the Companies Act 2006 defines “employees’ share scheme” as a scheme for bona fide employees or former employees. Because schemes that fall outside this definition do not qualify for certain valuable exemptions (e.g., pre-emption rights and financial assistance prohibitions), UK companies rarely offer share schemes to non-employees, making a large population of modern day workers (including gig economy workers and other types of independent contractors, but also non-executive directors) ineligible to participate in valuable share incentivisation arrangements. Given the evolution of employer-employee relationships, it seems only logical that companies may wish to extend participation in these schemes to workers.

In addition to recognising the different types of workers, any reformed approach also needs to take into account the fact that many people’s working patterns have changed in recent years. More individuals are now engaged in irregular forms of work, with varying workflows and income, and longevity within a single company is not as normal as it once was. Tax-advantaged share schemes that require employees’ commitment to an employer for a long period of time, or to fixed monthly contributions for three to five years, are no longer attractive or necessarily a priority for such individuals.

Boosting participation levels

Indeed, the drop in participation that we have seen amongst companies that offer share schemes is borne out by the Government’s most recent statistics. Although EMI schemes have had huge growth since 2010, there is a stark contrast to be made with the remaining three tax qualifying share schemes (CSOP, SAYE and SIP), which have had a 15% drop in companies offering these schemes since 2010. 

Unsurprisingly, higher earning employees are more likely to participate in employee share ownership schemes. This will certainly only be exacerbated by the cost-of-living concerns in today’s economic climate.  

Share schemes serve their purpose best when workers at all levels of a company participate and their interests are aligned with those of shareholders. Therefore, more needs to be done to enable a higher level of participation from individuals with a lower level of income. A greater freedom in a company’s ability to award shares for free would be a significant tool in enabling all employees within a company to participate in share schemes. For example, even though a tax-advantaged SIP does permit a company to offer free shares, the conditions for an offer of shares must be the same for all participants in the SIP, so free shares must be offered to all employees in a scheme. As a way to promote accessibility across workforce, some have suggested tailoring SIP rules so that a company is permitted to, for example, use a tiered system so that lower income employees could be given shares for free, while higher income employees still pay for their shares. Another idea may be some form of a tiered tax advantage that tapers off as an individual’s income level increases (similar to the marginal tax rates).

Another practical barrier to widespread share plan participation is the complexity of some share schemes. This has a two-fold effect as not only will employees not be willing to participate if there is uncertainty as to what is being offered, but companies themselves may not be willing to offer certain types of share schemes (e.g. SIPs) in the first place if it is expensive or burdensome to implement and there is risk of non-compliance without spending large legal fees. Simplifying the legislative requirements around the UK’s tax-advantaged all-employee plans will help.

Attractiveness of the UK

The UK Government has stated that it aspires to be in a position where it can create a “European Silicon Valley” – i.e., compete with the US as a world-leading hub for tech companies.

Tech companies, particularly start-ups, may not be cash generative in the short term. Therefore, instead of providing cash incentives to employees, equity ownership is often a key way for them to attract the best talent. EMI options have had an important role to play here to date. But more could be done to improve a UK company’s ability to award shares or share options for free to non-employees, or even simplify the rules on tax-advantaged share schemes so that companies do not need to spend undue time and money to offer the schemes in the first place. The UK needs an equity culture and legislative framework that support these kinds of tech companies both when they are in start-up mode and as they grow and scale.

Even for bigger, more mature companies, the US still has a significant advantage over the UK as listed companies are expected to comply with differing dilution requirements in the two jurisdictions. In the UK, the Investment Association Principles of Remuneration state that share plan awards for discretionary plans in listed companies should be no more than 5% of the company’s share capital in a rolling 10 year period. This is in contrast to the position in the US, where the ISS would normally expect dilution limits to be below 20% for the S&P 500 model (and 25% for the Russell 3000 model). What this means in practice is that US companies can attract the best talent as they have bigger headroom, while UK companies are constrained and can run out of their 5% allowance quite quickly. Following the US approach and increasing the dilution limit is likely to go a long way in increasing UK companies’ ability to compete against their US counterparts.

Potential reforms

The underlying share scheme legislation in the UK has not kept pace with the change in working culture. However, the Government’s call for consultation gives scope for real progress to be made in respect of broadening participation amongst the workforce considered to be eligible and increasing understanding and accessibility in terms of cost from both an employee and employer perspective.

In addition to the points made above, we would suggest:

  • Reduction of holding requirements – One easy win would be addressing the requirement for tax-advantaged SIP trusts to hold shares for 5 years by reducing this to a 3-year holding requirement instead.
  • A holistic approach to legislative amendments – Any changes will need to consider the financial promotion regulations, the Companies Act 2006, and possibly the Prospectus Regulations, so a holistic approach should be taken. For example, from an investor protection perspective, there are still ways to expand the scope from pure employees to workers, but have appropriate safeguards to ensure that participants have the requisite knowledge and information (perhaps we can learn from the US in this respect as they have rigorous securities laws but still permit non-employee participation in share plans).
  • Co-ordinated approach with further reform – Reforms discussed in this blog would be in line with the proposed UK Corporate Governance Code reform that would encourage, for example, NED participation in share plans (NEDs are typically not employees). This provides a great opportunity for a coordinated approach to reform so that both the legislation and the related guidance are well-integrated and provide a strong platform for equity awards in the UK. 


In light of changing working culture, how we interpret the concept of “employees” in share schemes needs to catch up with today’s world. Therefore, the Government’s call for evidence is a great step towards reinvigorating the use of share incentivisation arrangements and ensuring that they remain an attractive tool as possible for companies.


share plans, budget reform, tax, employment, incentives