An Enterprise Management Incentive (EMI) share option scheme is a highly popular mechanism used by companies, particularly startups and small businesses to attract, retain and motivate talented employees.
Specifically, EMI option schemes provide tax-advantageous share options to employees, enabling them to purchase shares in the company at a future date for a fixed price. This can be a great way to retain valuable employees. But how exactly do EMI share option schemes work? Let us take a look.
What are EMI share option schemes?
A share option is a right to buy shares in a company according to terms set out in a specific agreement. This agreement will specify how many shares an employee may acquire, how much they will have to pay for the shares, and when the shares are actually available to the employee.
A company can offer EMI share option schemes if it has both:
- assets of £30 million or less
- fewer than 250 full-time employees.
The scheme allows companies to offer share options of up to £250,000 per employee over a three year period. For the employees to qualify for the scheme, they must work at least 25 hours a week or 75% of their total working time.
Tax benefits of EMI share option schemes
EMI share option schemes are particularly tax advantageous for multiple reasons:
- For employers: There’s generally no tax cost at the time of granting or exercising the options, as long as the exercise price is at least equal to the market value of the shares when the options were granted. Employers can also claim a tax deduction for the difference between the market value of the shares at the time the options are exercised and the amount paid by the employees to exercise the options.
- For employees: Employees do not pay Income Tax or National Insurance Contributions (NICs) on the grant of the options, and if the shares are bought for at least market value at the time the options were granted, then no Income Tax or NICs are due at exercise. Capital Gains Tax (CGT) may be due if the shares are sold at a profit, but the growth in value from the grant of the option to the point of sale is eligible for beneficial CGT treatment.
The main tax benefit of EMI schemes is the favourable tax treatment for employees, particularly regarding the potential absence of Income Tax and NICs at the time of exercise and the possibility of CGT relief on eventual sale. For employers, the primary advantage is indirect, stemming from the ability to attract and retain key staff through a potentially lucrative share option scheme and the tax deduction on the exercise of the options.
Attracting and retaining talent with EMI share option schemes
Outside of the tax efficiency compared to other share option schemes there are other benefits of EMI schemes for employers, particularly when it comes to attracting and retaining top talent.
By offering share options, you can offer (potential) employees a compelling compensation package that includes an interest in the company’s future success. This alignment of employee and company interests can lead to increased motivation and productivity, as employees are directly incentivised to contribute to the company’s growth and profitability.
Employees do not have to pay income tax or NICs if they buy the shares for at least the market value they had when they were granted the option. If they were given a discount on the market value, you might have to pay income tax or NICs for the difference between what they paid and what the shares were worth. If they buy the shares within 10 years of being offered them, they will not pay income tax or NICs on the difference.
It is important to note the changes in notification deadlines for the 2024/25 tax year. For EMI options granted on or after 6 April 2024, companies must notify HMRC by 6 July following the end of the tax year in which the grant was made. For options granted before this date, the notification must be made within 92 days of the grant.
This framework ensures that EMI schemes remain a powerful tool for companies to reward their employees while enjoying significant tax advantages.
How Business Partners can assist
EMI share option schemes are an exceptional tool for companies, especially startups and small businesses, to attract and retain top talent. The tax advantages, including relief from income tax and NICs, along with the potential for significant corporation tax deductions, make them highly attractive for both employers and employees. By aligning the interests of employees with the success of the company, EMI schemes can drive motivation, productivity and loyalty ensuring that the business thrives.
It is crucial for companies to stay informed about the specific regulations and deadlines to fully leverage the benefits of EMI share option schemes. Business Partners, as our name suggests, is here to help your business prosper on every step of the journey. We are here to help you with comprehensive tax planning, ensure compliance with the latest HMRC guidelines, optimise your share option schemes for maximum benefit and provide ongoing support and advice tailored to your unique business needs.
Let us partner with you to create a thriving, motivated workforce and achieve your business goals. Contact us today.
