Enterprise Management Incentives (EMI) scheme for start-ups Guide

When you’re running a small business, you want a team behind you that’s fully motivated and, if you’re looking to recruit new talent, you need an offer that will attract the right people. That’s where the Enterprise Management Incentives (EMI) scheme can play a vital role in helping you grow your business through your people. EMI is a government scheme that allows you to offer your team share options in a very tax-efficient way. And, the nature of the scheme makes EMIs a powerful incentive that motivates employees to add value to the business.

The EMI scheme

An Enterprise Management Incentives (EMI) scheme is an employee share option scheme with strong tax advantages available for qualifying businesses. This is a brief summary of the scheme.

• If your company has fewer than 250 full-time equivalent employees and gross assets of £30 million or less, you may be able to offer EMI options.

• Your company must be an ‘independent trading company, not controlled by any other company.

• You can grant employees share options up to the value of £250,000 at the time the option is granted.

• Employees will not have to pay Income Tax or National Insurance if they buy the shares for at least the market value they had when you granted the option.

• If employees were given a discount on the market value, they will have to pay Income Tax or National Insurance on the difference between what they pay and what the shares were worth.

• Employees may have to pay Capital Gains Tax if they sell the shares.

• The total value of unexercised EMI options across the company cannot exceed £3 million.

Qualifying companies

Provided your company is independent and meets HMRC’s criteria for assets and employee numbers, you qualify.

However, a number of business activities are excluded from the scheme. Certain activities are excluded from EMI qualification, including banking, insurance, leasing, property development, and some professional services businesses.

Qualifying employees

You decide which employees should be offered participation in the scheme. However, they must meet certain qualifications:

• They must work at least 25 hours per week for your business.

• If they work part time for less than 25 hours per week, their time with your business must represent at least 75 percent of their total weekly working time.

• An employee must not hold more than 30% of the company’s shares or voting rights.

Tax advantages of the scheme

When you grant an option to an employee, they will not have to pay Income Tax. Other types of financial incentive would be subject to Income Tax.

If the employee exercises their option, they will not be liable to Income Tax if the price equals or is greater than the market value of the shares when they were granted.

If you offer the shares at a discount to the market value, the employee would be liable to Income Tax on the difference between the price you offer and the market value of the shares.

If the employee later sells the shares, any gains are normally subject to Capital Gains Tax. In many cases employees may qualify for Business Asset Disposal Relief (BADR), which means gains may be taxed at 10%, subject to the relevant conditions.

This compares to a potential 60.8 percent rate based on a combined rate of Income Tax and employee and employer's National Insurance contributions for unapproved options or cash bonuses.

There are also tax benefits for your business:

• You will not have to pay National Insurance contributions on the grant or exercise of the option.

• You can claim Corporation Tax relief when an employee exercises their option.

• From April 2023, companies granting EMI options are no longer required to include specific share restrictions in the option agreement to qualify for tax relief.

Related: How to pay Corporation Tax: A guide to rates & deadlines

Related: A guide to Corporation Tax trading losses for business owners

Option agreements

If you want to offer an employee an option under the EMI scheme, you must prepare an agreement that sets out the terms of the scheme. This agreement should cover:

• The number of shares the employee can acquire – up to a total value of £250,000 at the time the option is granted.

• The type of shares you are offering – either ordinary shares or special non-voting shares, for example.

• The price the employee will have to pay for the shares if they exercise their option.

• The level of discount, if any, you offer on the market value of the shares.

• When the employee can exercise their option and acquire the shares. This could be immediately, after a specific period, based on achievement of specific targets or following the sale of the business.

• The rules that apply if a participating employee leaves the company.

Formalising the option agreement

There are a number of checks and processes to complete before granting employees an option:

• Review your company’s Articles of Association to ensure you can grant EMI options.

• Obtain the consent of existing shareholders to grant EMI options.

• Review and agree on the option at a board meeting.

• Obtain the signatures of both parties to the agreement.

Related: Here’s Why You Need a Written Partnership or Shareholders Agreement

Informing HMRC

Before granting EMI options, companies typically obtain a valuation agreement with HMRC to confirm the market value of the shares. This helps ensure the correct tax treatment when options are granted and exercised. You must inform HMRC within 92 days that you have granted the options. If you miss the deadline, any tax relief under the scheme will not be available.

Maximising the benefits of the scheme

The aim of the Enterprise Management Incentives scheme is to encourage business growth, so it’s important that you design your scheme to maximise the benefits.

For example, you might decide to offer the scheme to key employees whose work is essential to the growth of the business.

You could offer the scheme to a wider group of employees and set performance targets in areas critical to business success.

You can tie the timing of the option to exercise to the value of the shares, so that employees can only buy shares when the value of the business increases.

Support from Accounts and Legal

This is a brief outline of the rules and benefits of the Enterprise Management Incentives scheme. If you would like professional advice on any aspect of the scheme, or would like confirmation that you are complying with HMRC’s rules, our team of experienced tax accountants will be glad to help.

To find out more, please contact us on 0207 043 4000 or info@accountsandlegal.co.uk. Or, click the link for an instant accountancy quote.