Enterprise Management Incentives

“An EMI scheme provides huge benefits to both employer and employee by connecting them through a common goal of business growth and success.”

Steve Lawrey, Wilson Partners

An Enterprise Management Incentive (EMI) is a Government approved share option scheme that provides significant tax advantages to employees and substantially boosts incentive value – it is the most tax beneficial system for staff. The EMI was introduced in 2000 to assist growing companies in attracting and retaining key employees and to reward those employees for taking the potential risk to work for such companies.

What is a share option agreement?

A share option agreement gives someone the legal right to buy a company’s shares in the future, but under EMI, this purchase is at a price that is fixed today. If the value of the company increases over time, the option holder could make a significant profit when they sell their shares, which makes options very useful for companies that want to incentivise key employees.

How do EMI share option schemes work?

EMI

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The company should first establish whether it is EMI qualifying. If it is, it should decide in outline how its EMI scheme plan is to work. Decisions should be made on:

  • which employees should be granted options and over how many shares
  • when should options be exercisable, for example should exercise be based on performance targets or occur only when the company is sold
  • what type of shares should be subject to options, for example should they be ordinary shares or a special share class designed for options, perhaps non-voting shares
  • how much will employees have to pay to exercise options and acquire their shares
  • what happens if an option holder leaves the company

Once these issues are decided, formal EMI option agreements should be prepared recording all the relevant terms. Once signed by company and employee, the options are formally granted.

The option grant must be notified to HMRC within 92 days. The market value of shares should be agreed with HMRC in advance of the options being granted, as this will provide certainty as to the tax treatment of option exercise.

The benefits to both parties involved are huge. For employees, there is a chance to participate in the growth of the company, with little or no outlay, as well as a generous tax benefit. They will not have to pay the income tax that would normally be charged on the market value of any shares or options granted to them. If employees are given options under an approved EMI, they are potentially only charged capital gains tax at 10% on the increase in value over what they pay for the shares (the option’s ‘exercise price’), so long as that price is at or above the market valuation of the shares on the date of granting the options. This value is agreed upfront with HMRC as part of the process. Being part of an EMI scheme shows the company’s commitment to their employment and development.

For companies, EMIs can be part of the package in attracting higher calibre employees. The employee who can see the potential in a large lump sum through the sale of shares may well be persuaded to join a company, even if there is no joining fee offered or the salary maybe lower than offered from other companies. In addition, employee share ownership encourages individuals to be concerned and in touch with the company’s owners, growth and direction. By growing the business, the shareholder value will increase and employees will benefit through the sale of their shares. The company can also obtain a corporation tax deduction on the exercise of the options on the difference between the exercise value and the market value on exercise.

This can only be determined by what is best for your business. If employees have shares from the outset they will need to pay for them or will receive a tax charge if their shares are gifted or bought at less than full value. If any employee leaves a company with shares, then complications could arise.

Share options are only exercisable upon achievement of targets or after a set timeframe. This means that companies can manage their employee retention and have structured planning around shares. Generally, EMI schemes are setup in a way to ensure that options lapse in the event of any employee leaving the company.

An unapproved share option plan involves the granting of a specific number of options to an individual. These options will provide that the individual can, at an agreed date or point in time, acquire a given number of shares (the underlying shares) for a fixed price.

Given that there is both no upfront cost to acquiring the options and no requirement for the individual to pay over any monies unless the underlying shares increase in sufficient value there is little risk attached to the receipt of options. As a result, the tax treatment on exercise of an unapproved option and rates applicable will often appear to be very similar to cash bonuses.

No income tax or national insurance is payable when EMI options are granted. When option shares are sold the employee will be liable for capital gains tax (CGT), which is potentially as low as 10% under Business Asset Disposal Relief, rather than income tax. The employee can also use their annual CGT exemption.

If the options’ exercise price is set at the same or a higher price than the agreed market value of shares on the date that the option is granted, then no income tax or NI is payable when the option is exercised.


EMI options can only be granted to a qualifying employee of a qualifying company. A qualifying company must be independent, that is not controlled by another company. The company has discretion to decide which employees should have options, up to a maximum share value of £250,000 per employee, £3 million for the whole company.

Employees (including directors) qualify if they are engaged to work at least 25 hours per week for their company or group or, if less, for at least 75% of their working time. A part time employee can qualify for example by working two days a week for the company, provided that work elsewhere does not amount to more than 25% of the whole. Employees do not qualify if they already own more than 30% of the company.

Yes! There is lots of flexibility for designing an option scheme tailored to your company. You can structure the timing of when staff can ‘exercise’ their options and buy their actual shares in all sorts of ways, for example they could be allowed to buy their shares immediately, over a period or on a sale of the company.

To protect the business, most schemes provide that if an employee leaves the company, then they automatically lose their options or shares, although this can be subject to the board’s discretion and negotiated in the case of redundancy. The option shares can be a different class of ordinary share that could for example be non-voting and subject to buyback if the employee leaves. The option will be formalised in a legal contract, which will include all the necessary rules and conditions.

If you would like more information and to understand how an EMI scheme could benefit your company and employees, then call Steve, Alan, Nick or Jodie on 01628 770 770 for a no obligation chat.

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