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Business Planning

Cost Benefit Analysis and Taxation of Employee Benefits

Employee benefits legislation and practice is constantly changing.

Employers must ensure that they both take their legislative and regulatory obligations seriously and also are aware of the growing array of employee benefits packages that are available in Ireland to attract and retain staff. 

Any Employee Benefits process must therefore be well planned, properly controlled, efficient, cost effective and individually tailored to the needs of the business.

Key benefits that employers should consider


Risk benefits

The provision of group risk benefits will offer a cost-effective solution for the provision of benefits that employees would otherwise need to arrange for themselves on an individual basis.

It will also promote goodwill within the company in situations which would otherwise result in potential financial hardship for employees.

Retirement benefits

For senior employees an employer sponsored Executive Pension can create an extremely flexible and cost-efficient retirement vehicle. 

However, the employer is required to make a “ meaningful contribution” to the arrangement

Employee Equity Participation

Rewarding key employees with equity in the company should provide a focus on increasing the value of the company and promote an inclusive culture within the business with more of a sense of career rather than a job.

Although tax benefits have been cut back with the removal of approved share options schemes, marginal tax incentives are still available to employers and employees.

Equity Participation


The alignment of employee’s interests with those of the owners of the company should lead to enhanced employee loyalty, motivation and commitment resulting in a sustained improvement in company performance.

Over the 17 years to October 2009, employee owned companies have outperformed FTSE All-Share companies each year by an average of 10%. Over successive three year periods they have outperformed by 41% and over successive five year periods by 78%.

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Key Employee Engagement Programme Scheme


The Key Employee Engagement Programme (KEEP) scheme is a tax-advantaged share scheme, intended to allow Irish employers to compete with the share option schemes used by large multi-national employers to attract and retain employees.

This scheme is likely to be of benefit to employers who wish to award employees the opportunity to earn a bonus based on future share price performance without them necessarily becoming long-term shareholders in the company.

How the scheme works


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KEEP applies to qualifying share options granted between 1 January 2018 and 31 December 2023.

In summary the scheme works as follows:

An employee is granted an option to acquire shares at a price that is no lower than today’s market value – therefore the employee is not awarded any existing value in the company.

If, by the time the employee exercises the option the shares have increased in value they are not subject to tax on the uplift at that time.

Instead, they will be subject to Capital Gains Tax on the uplift if and when they dispose of the shares and realise this uplift.

The employer will not be liable to Employers’ PRSI.

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Advantages and Disadvantages


Advantages of the scheme

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  • Incentivisation: Employees are incentivised to maximise performance, knowing that they will share in any share price appreciation
  • Flexibility for employer: The employer can be selective in offering it to employees, i.e. there is no requirement to offer it to all employees.
  • Flexibility for employee: The employee will have a considerable period of time (up to ten years) during which to exercise the option. Once exercised they do not have to retain the shares for a minimum period.
  • Facilitates broader employee participation: As an options-based scheme, employees tend in practice to exercise the options and quickly sell the shares to realise their value. 
  • Cost and administration: While there are some administrative obligations, KEEP is still likely to carry a much lower cost and administrative burden than some existing share-based remuneration schemes.
Disadvantages of the scheme

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  • Lack of rigidity: As noted above, while the likelihood that most employees will not end up becoming long-term shareholders in the company can have its advantages, it may not appeal to employers who are keen to lock in key employees as shareholders for a period of time.
  • Time value of money: An employee may prefer to take a cash bonus up-front, even if subject to Income Tax, rather than a bonus that is both uncertain and might not be realisable for a number of years.
  • Realising value: There is no certainty that the employee will be in a position to realise value from any shares after exercising an option.

Restricted Share Scheme


In some cases, an employer may wish to award shares directly to some key employees. In addition to giving them a greater sense of responsibility and incentivising them to drive company performance, it may also serve to instil loyalty to the company. Unlike the KEEP Scheme, the Restricted Share Scheme allows the employer to give the employee some of the existing value in the company.

How the scheme works

Tax treatment

Where an employee is given shares in their employer company, they are subjected to Income Tax, PRSI and USC on the market value of those shares.

The tax legislation however provides for a reduction in this tax liability where a time restriction is placed on the employee’s entitlement to dispose of the shares. The reduction in the taxable value of the shares can be as high as 60%.

The downside is that the tax liability, although greatly reduced, will still be payable up-front even though the employee will not be in a position to realise any value in the shares for a number of years.

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Advantages and Disadvantages


Advantages of the scheme

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  • Building senior team: This scheme may be useful where there is one, or a number of key employees to whom the employer wishes to give a stake in the company
  • More tangible value for employee: The employee in this case is getting shares that have an existing value. This is in contrast with the KEEP scheme where they get no benefit from the options unless the share price appreciates
  • Loyalty: Employee is locked in as a shareholder for a number of years, which can have the effect of engendering greater loyalty on their part
  • Incentivisation: As shareholders, the employees will be incentivised to drive share price performance
Disadvantages of the scheme

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  • Administration burden: It will entail setting up a Trust to hold the shares for the restricted period, which can add a layer of complexity, although this can be managed
  • Realising value: As with the KEEP scheme, a key challenge will be how to enable the employee to convert the shares to cash
  • Time value of money: As with the KEEP scheme, the employee may prefer an up-front cash bonus, especially when the restricted period is factored in

Which scheme is best for your company?

Download our full length guide: A Guide for employers: Cost Benefit Analysis and Summary of Taxation of Employee Benefits 

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