EMI scheme - legal overview

Our share schemes team has implemented numerous successful EMI schemes across many sectors. We combine technical expertise with commercial awareness to deliver practical, effective solutions tailored to your business needs. With extensive experience in scheme design and implementation, we can help navigate the complexities while maximising the benefits for both company and employees.

What is an EMI scheme?

An EMI scheme enables qualifying companies to grant share options to eligible employees with significant tax advantages. Enterprise Management Incentives (EMI) schemes are the UK's most tax-advantaged share option scheme, designed to help smaller companies attract and retain key talent.

Under an EMI scheme companies grant share options to employees under favourable tax conditions, making them a powerful tool for business growth and employee retention.

Employees can acquire shares in the company at a fixed price, potentially realising substantial gains when they eventually sell their shares. Employees like the flexibility to defer investment until exercise, reducing initial financial commitment and with no obligation to exercise options if the company is not doing well.

An EMI scheme can be tailored to meet specific business objectives through various design features, vesting schedules, and performance conditions.

How does it work?

The company identifies employees they want to incentivise and determines how many share options to grant them. The current market value of the shares is determined, which must be agreed with HMRC through a formal valuation.

The company then creates option agreements outlining when and how employees can exercise their options to buy shares at this fixed price. Once HMRC approves, the company registers the scheme and notifies HMRC within 92 days of granting the options.

Employees can then exercise their options according to the agreement terms - typically after a certain time period or when specific company goals are met. When exercised, they buy shares at the price set when the options were granted, regardless of current market value.

The employees can later sell these shares, with any profit being subject to Capital Gains Tax rather than higher Income Tax rates.

When to Consider EMI

• Growth phase companies - with a clear path to value appreciation and potential exit within 3-5 years

• Competitive sectors - industries where talent acquisition and retention are challenging due to salary competition

• Capital constraints - businesses needing to conserve cash while offering competitive packages

• Pre-exit planning - companies preparing for sale or IPO within a defined timeframe

• Team building - organisations looking to build long-term committed management teams

Qualifying criteria explained

There are 2 aspects to this - the company must meet eligibility requirements and so must an employee to qualify for the tax advantages.

Company Requirements

• Independent status - not controlled by another company, which creates complications with parent-subsidiary relationships and joint venture arrangements.

• Gross asset limit - must not exceed £30 million, calculated according to HMRC's specific valuation rules including intangible assets.

• Employee count - must have fewer than 250 full-time employees across all group companies, with part-time employees counted proportionately.

• Trading company - must carry out a qualifying trade, excluding specific excluded activities such as banking, farming, property development, legal services, and shipbuilding.

• Substantive permanent presence in the UK - not just a registered office.

Employee Requirements

• Minimum hours or percentage of work time - at least 25 hours per week or 75% of working time for the company, with detailed records maintained to evidence compliance

• Shareholding restrictions - not more than 30% of the company's shares, including shares held by associates and connected persons

• Option limits - individual employee options limited to £250,000 within a 3-year period, with careful monitoring of grant dates and values

• Employment status - must be an employee with a formal employment contract, excluding non-executive directors and consultants

• Tax residence - no specific requirements, but tax implications vary for internationally mobile employees

Tax advantages for employers and employees

• Tax efficiency - corporation tax relief on option gains, potentially saving 19% or more on the value of option gains

• NIC savings - no employer's National Insurance contributions on option gains, saving 13.8% on the value of benefits

• Tax-efficient growth participation - no income tax or National Insurance on grant or exercise of market value options

• Favourable CGT treatment - potential 10% tax rate on sale with Business Asset Disposal Relief, compared to standard rates of up to 20%

Next steps

Contact our specialist EMI team to arrange an initial consultation. We'll assess your eligibility, discuss your objectives, and provide a clear proposal for implementing your EMI scheme.