What is the Enterprise Management Incentive (EMI)?
The EMI scheme is a flexible, tax-efficient share option plan available in the UK designed to give employees a stake in the business. It can work to attract, retain and incentivise your employees. Mainly used by small to mid-sized companies, over 16,400 companies operated this type of scheme based on the latest employee share schemes statistics (2024) provided by the UK government .
How does an EMI scheme work?
An EMI scheme is a type of share option plan. At the time of grant, your employees are given an EMI option to buy shares in your company at a future date at a certain price (i.e. the exercise price) after meeting certain conditions, e.g. performance and/or service period.
Once the conditions have been met, employees can then exercise the options to buy the shares. If your company succeeds and the share value increases, they can potentially sell their shares at the then current (hopefully higher) market value for a profit.
An EMI example
Lewis works for a startup in the UK. His company uses the EMI scheme to issue options to its employees, including Lewis. He is granted EMI options to acquire 2,000 shares at £10 each in the future. After two years, he exercises the options as he fulfils the length of employment service conditions. He subsequently sells his shares at once for £30 each, the current market value.
Are EMI schemes worth it?
Benefits of EMI for employers:
1. Attract, incentivise and retain talent by providing skilled employees with potential financial rewards beyond basic salary if the business becomes successful and the share value grows.
2. Promote employee ownership culture: Studies have shown that companies with employee-owners generally have lower turnover and levels of absenteeism, and more company pride and loyalty.
3. Achieve better alignment: Having an ownership stake in the company can help align employees’ interests with the company’s missions and goals.
4. Implement a scheme flexibly to best suit your needs: You can decide the exercise price, the number of EMI options to be granted, vesting criteria, termination rules, employee eligibility etc.
5. Enjoy corporation tax relief if qualifying shares are acquired by employees upon the exercise of an EMI option. The deduction matches the difference between the market value when the shares are acquired and the amount that the employee pays for them. It’s important to note that relief may be restricted by disqualifying events.
”For employers, gains on qualifying EMI options are generally exempt from employer’s National Insurance and qualify for a valuable corporation tax deduction, therefore potentially delivering a cash benefit to the company worth 25% of the gain,”
– says Martin Cooper, Partner at RSM UK, in the ‘’Too big for EMI’’ interview with us
Benefits of EMI for employees:
1. Build wealth: Options are likely to provide a more significant financial benefit than a fixed cash payment.
2. Enjoy tax benefits: EMIs offer employees generous tax advantages in a qualifying event throughout the lifecycle of an option. For example, no income tax and National Insurance Contributions (NICs – the UK term for social taxes/social security) is charged at the time of grant and exercise. Relief may be restricted by disqualifying events.
Limitations of EMI
An EMI scheme is a type of share option plan, meaning if your company fails and the share value decreases, employees may not be able to sell their shares for a profit.
In addition, EMI is not always the most suitable scheme for your business as there are a number of conditions to be satisfied in order to qualify for the EMI tax benefits (i.e. qualifying conditions). In this case, you may need to consider other choices like an unapproved option scheme. Read on.
EMI option scheme vs unapproved option scheme
Unapproved options, also called ‘non-tax-advantaged’ options, don’t provide the generous tax benefits that EMI options do, as they are not HMRC approved. They however provide more flexibility to businesses in scheme design.
| Unapproved Options | EMI Options | |
| Rules to follow | Few | More (e.g. requirements for companies, employees and shares) |
| Participation restrictions | No statutory restriction | More restrictions (e.g. working hours and material interest) |
| Tax at exercise | Income tax and NICs are generally charged | No income tax and no NICs (if conditions fulfilled) |
| Tax at sale | Subject to Capital Gains Tax (CGT) – 10% or 20% | CGT at a favourable Business Asset Disposal Relief rate (10%) |
| Purposes | Issue options where tax-efficient structures are not appropriate for your company’s needs | Issue options while providing favourable tax treatments |
Qualifying conditions
To qualify for an EMI and thus receive the tax benefits there are qualifying conditions applicable to the EMI, companies, employees and options that must be met. Note: This list is not intended to be exhaustive; the EMI legislation contains other requirements which should be considered:
Companies:
- Have a permanent establishment in the UK
- Is not majority-owned by another entity
- Only have ‘qualifying subsidiaries’
- Have fewer than 250 full-time employees
- Have gross assets of £30 million or less
- Is not in any of the ‘excluded activities’ including banking, insurance, farming, property, legal services, hotels and care homes, and shipbuilding
Employees:
- Individuals must be an employee of the company or one of its qualifying subsidiaries when the EMI option is granted
- Work at least 25 hours each week or 75% of their working time for the company
- Must not have a material interest of more than 30% of the ordinary share capital of the company before the options are granted
EMI options:
- To be offered up to a maximum of £250,000 worth of shares to each individual
- Must be exercised within 10 years of the grant
- Must be registered with HMRC by 6 July following the end of the tax year in which the EMI options were granted (previously HMRC had to be notified within 92 days of the date of grant) and any grants included in an annual return submission to HMRC
In the meantime, it’s worth noting some disqualifying events which can disqualify an option from the beneficial EMI tax treatment:
- The company comes under the control of another company
- The company no longer meets the trading activities requirement
- The employee is no longer eligible
- Certain types of variation to the terms of the option
- Alteration to the share capital of the company
The onus is on you, as a participating company, to continually analyse your scheme, inform HMRC of any changes, communicate internally and therefore minimise the risks of participants not receiving the rewards they had been promised.
Tax on EMI options for employees
Sticking with the same example, here’s a tax scenario of Lewis from the time of grant to exercise and sale, assuming the option satisfies all of the EMI qualifying conditions.
1. At the time of grant: Lewis was granted an EMI option to acquire 2,000 shares at £10 each, their then market value.
No income tax/No NICs
2. At the time of exercise: After two years, he exercised the option to buy all the shares at £10 each.
No income tax/No NICs
Note: Since the shares were purchased for at least the market value at grant, no income tax and employee or employer NICs are charged upon exercise. Income Tax or NICs would be paid if a participant was given a discount on the market value.
3. At the time of sale: Lewis sold his shares at once for £30 each (the current market value), which was more than the cost (£10), CGT might be payable on the gain of £40,000 [£30-£10)x 2,000], subject to Lewis’s personal circumstances.
CGT may be charged
How to set up an EMI scheme?
If you decide to implement an EMI scheme for your company, follow these simple steps. NOTE: It is recommended that you obtain professional advice to ensure you satisfy all the requirements:
1. Confirm you qualify for an EMI scheme
Go back to the ‘Qualifying conditions’’ section to check the scheme requirements for your business, employees and options.
2. Structure your scheme rules & agreements with employees
Prepare your share option rules and agreements with employees. e.g. vesting schedule, types of options, number of shares being granted, if the employee leaves can they still exercise their option? Refer to our EMI design guide.
3. Get an HMRC-approved EMI valuation
Although getting an HMRC-approved EMI valuation isn’t compulsory, it’s wise to do so because it can ensure you avoid granting the option at a discount and makes sure the tax benefits of the EMI scheme will apply, provided all other processes and formalities are followed.
4. Grant EMI options
Once you’ve had your valuation agreed, you can grant the EMI options. You should do it within three months since the approved valuation remains valid for 90 days from the date HMRC approves it.
5. Register the scheme with HMRC
This step must be done by 6 July following the end of the tax year in which the EMI options were granted. Follow the steps here.
Enterprise Management Incentive Schemes, Simplified
EMI is one of four HMRC-approved share schemes, to help you attract, retain and motivate top talent that may otherwise be out of your financial reach. Making sure you qualify for the scheme and receive as many benefits as possible can be challenging sometimes if you DIY from scratch.
Our equity professionals have gone down this road with clients many times and can provide you with all that you need to know about how to develop an EMI scheme for the first time. In addition, our equity management software can help you manage your EMI scheme from plan setup to launch, through enrolment, administration and EMI notification report generation (for HMRC filing purposes).
(Free for up to 100 stakeholders)
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All case studies are shown for illustrative purposes only and are hypothetical. Any name referenced is fictional, and may not be representative of other individual experiences. Information is not a guarantee of future results.
Please Note: This publication contains general information only and J.P. Morgan Workplace Solutions is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. J.P. Morgan Workplace Solutions’ Insights is not a substitute for professional advice and should not be used as such. J.P. Morgan Workplace Solutions does not assume any liability for reliance on the information provided herein.
