Enterprise Management Incentives (EMI)
For small high-growth companies it can be a challenge to attract and retain talent when you are competing with the high salaries and brand names of larger, well-established global companies.
Offering employees a share of the company that they are helping to build can be an excellent – and cheaper – way to convince people to join the company and stay for the long haul.
In the UK, there are four tax-advantaged share schemes promoted by HMRC:
- Share Incentive Plans (SIP);
- Save As You Earn option scheme (SAYE);
- Company Share Option Plans (CSOP);
- Enterprise Management Incentives (EMI).
Of the four tax-advantaged share schemes, EMI is undoubtably the best and the one that most of our clients use.
EMI at a glance:
EMI is a highly flexible and tax-efficient share option scheme for SMEs. It helps startups and scale-ups compete for top talent by offering employees a stake in the company’s success, with significant tax advantages compared to cash bonuses or unapproved share options.
How EMI schemes work
Under the EMI scheme, which is aimed specifically at SME companies, employees can acquire shares free of tax and NICs. The scheme is more flexible than other tax-advantaged schemes (but consequently has more rigorous qualifying and reporting conditions) and is targeting smaller high-growth companies.
An EMI scheme is discretionary, so the employer can decide which employees are to be included. However, as the EMI scheme is discretionary and offers a high degree of flexibility in how the scheme operates, companies are often left unsure how to proceed. It is therefore advisable to use both a legal expert and an accountant to set up a scheme that both meets your need, is compliant with the HMRC’s rules and at the same time tax efficient.
When an EMI scheme has been well designed and thoroughly thought through, it really is a “win – win” for both the company and the employees.
Who can use the EMI option scheme?
To use the EMI scheme for your company there are number of different requirements that the business need to satisfy to qualify for the scheme:
- You need to undertake a qualifying trade or be preparing to do so. There are some non-qualifying trades as dealing in land, financial trading, leasing and property development. If you are receiving royalites, you may also be disqualified to use the scheme. If you do not qualify for the EMI option scheme there are other schemes available like the Company Share Option Plan (CSOP).
- You need to have an UK permanent establishment
- The Company (or group of companies) must not have gross assets exceeding £30 million at the time of the grant of the options
- The EMI options must be granted over shares in the parent company in case of a group.
- EMI options can be granted over both listed and unlisted shares
- The Company or the group must have less than 250 full-time employees at the time of the EMI option is granted.
In order to grant option to an employee the following criteria needs satisfying:
- The employee, including executive directors, must spend at least 25 hours a week working for the Company or 75% of your total working time for the company or the group.
- Individuals with a “material interest” usually 30% or more in the company or any of the subsidiaries, either on their own or together with one or more associates, do not qualify for the scheme.
Limits with the EMI scheme
The total value of the granted options cannot exceed £3 million at any time. An employee cannot hold options where the total value exceed £250,000.
Why is the EMI option scheme the most favourable?
The EMI option scheme offers the most tax efficient scheme for both the qualifying company and the individuals;
- At the time of grant of the options there is no income tax or NIC payable
- Normally no income tax or NIC will be payable when an employee exercises the EMI option, unless the exercise price is less than the market value of the shares on grant. In these circumstances, the difference will be chargeable to income tax and potentially NICs.
- Capital gains tax (CGT) is payable on the sale of the EMI option shares. The Business Asset Disposal relief (BADR) will likely reduce the CGT rate to 14% (18% from 6 April 2026) on the first £1m of lifetimes gains if the shares are sold more than 24 months after the grant of the EMI option;
In addition to the individual tax advantages, the employer company may also be able to claim corporation tax relief on the option gain.
Good to know
Disqualifying events
- The Company ceasing to carry out a qualifying trade;
- The option holder ceasing to be a qualifying employee;
- The option holder exceeds the £250,000
- The Company being taking over; or
- The share capital of the Company is altered in a way it no longer qualify
Other EMI requirements
The employee must be able to exercise the EMI share options within 10 years from the date of grant. This need to be documented in the option contract.
Each granted option needs to be communicated to HMRC by the 6 July following the end of the tax year in which the options was granted.
In order to achieve the favourable tax perk the employee need to hold the options for at least two years.
There are further EMI requirements that need to be considered so it is important to use a firm who understand the legislation.
How do you set up an EMI option scheme?
To avoid any issues with your option scheme we would always advice you to agree the market price of the options with HMRC ahead of granting any EMI options. In order to agree the option price, you will therefore undertake a business valuation. Typically, you would request a discount on the current market value which means that if accepted by HMRC you would make a profit already on day one. Metric has helped many companies achieving great value on their exercise price.
There are a number of documents that need to be provided to HMRC together with the actual valuation form VAL231. Metric has the experience to guide you through the process and to make it as smooth as possible. From our extensive experience we know where the pitfalls are and can help you to navigate through the sometimes-complex rules.
When you have received the market price of your options you can go ahead and grant your options to your employees within 90 days of the date of the valuation. We do not provide any support in the contract writing; this is a legal matter and therefore left to our legal colleagues. We work with several different law firms that have extensive experience from EMI contracts and together we will ensure that the contracts are compliant both from a legal and a finance perspective.
Ongoing documentation and filing
When an EMI option scheme has been set up and registered with HMRC you will need to submit an annual Employee Related Security (ERS) return to HMRC. In this annual return you need to state if any option holders have ceased, any options lapsed and detail any options that have been exercised during the year.
Furthermore, you will need to reflect the option charge in your annual accounts and in case of an option gain claim a tax relief through your CT600.
Whilst the administration burden around setting an EMI option scheme up is fairly low, maintaining the information for each option scheme and option holder for a growing company has proved challenging for some. If the data is not well-maintained from the start it can become a very time-consuming task to complete the ERS annual returns and to calculate the option charge for your annual accounts. It is important to keep up-to-date and accurate information at all times. Metric can help you set this up at the time of granting your first options.
