Enterprise Management Initiative (EMI) schemes can be a great way of recruiting, retaining and incentivising key staff. And although offering employee share options is particularly popular with younger entrepreneurial companies, they can also be helpful for more established businesses.
EMI schemes offer very favourable tax treatment to employees. They work by granting options to employees which entitle them to acquire shares at a later date, by exercising their options. There is no income tax or NIC at the time when the options are granted. Provided that the “exercise price” at which the employee can buy the shares is not less than their market value at the time when the options were granted, there is also no income tax or NIC charge when the options are exercised – so employees effectively benefit from a tax-free uplift in market value between grant and exercise of the options. In contrast, any such gain on non-EMI options would be subject to income tax at rates ranging from 21% to 46% (Scottish rates).
5 points to remember when considering an EMI scheme
1. There are limits – EMI is currently limited to trading companies with up to £30 million in gross assets and 250 employees, although the government is under pressure from industry to raise the limits to £100m asset cap and 500 employees. The company must not be controlled by any other company.
2. Consider option price and conditions – In order to provide certainty for employees over their tax position, it’s recommended that the market value of the shares should be agreed with HMRC before the options are granted. While granting options at a discount on market value leads to an income tax charge on exercise, it’s certainly open to employers to do this and they can even set the price at nil. Employers can incorporate performance milestones to be achieved before options can be exercised.
3. Employee incentivisation – On selling their shares, the employee is liable to capital gains tax (CGT) – generally at only 10% of the gain – and, if not already used, they can use their annual CGT exemption which changes each year and is currently £12,000. It’s common for employees to fund the option exercise price by selling the shares straight away – and indeed many schemes are “exit only” schemes which allow employees to exercise only on certain major events such as a sale of the business.
4. Costs and benefits – For the company, there is usually a tax deduction when employees exercise their options, based on the uplift in market value between grant and exercise. Although there are fees for setting up the scheme, ongoing running costs are modest. The main things to be aware of are that, as well as agreeing share values with HMRC up-front, which is not mandatory but is a good idea as it provides certainty, there is a requirement to notify HMRC each time options are granted. In addition, the scheme must be registered with HMRC when it is set up, and a return must be submitted each July.
5. Who qualifies? – Qualifying employees must work for the company at least 25 hours each week, or for at least 75% of their total paid working time (including self-employment). Each employee can hold unexercised options worth £250,000.
Get in touch
To find out if an EMI scheme could benefit your business, please contact Diane Wright.