Readers’ forum: Promoting employee into company shareholding

A client and his wife run a trading business through a limited company of which they are shareholders. They are thinking of promoting a long-standing employee into the shareholding of the company (by allotting new minority shares). This is to reward past services and to motivate future performance.

We have considered some obvious aspects such as non-tax implications of introducing a ‘stranger’ into the family business as well as the tax implications on granting shares to an employee. The tax charge arising on the market value of the shares at the time they are granted is considered acceptable by both parties and we are satisfied with the other tax implication of awarding the shares.

My question is rather focused on the income side. For the past few years the employee has been paid under PAYE – but this will cease on execution of the arrangement (the contract...