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EMI Schemes: What Are They and Why Should You Use Them?

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Oliver Hinds - Trainee Solicitor

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Article reviewed by Terry Moore and Olivia Sturgess.
4 minutes reading time

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What is an EMI scheme?

Enterprise Management Incentive (EMI) schemes are often used by smaller companies to attract and retain employees by offering share options which provide them with statutory tax relief on their financial gains.

Essentially, the scheme is designed to provide employees with a stake in the employer company, which can help incentivise employees.

Under an EMI Scheme, employees are granted an option to purchase shares in the employer company at a later date and a particular price (the ‘exercise price’).

The terms of the EMI option will specify that the exercise of the option to purchase can occur once specific conditions are met, such as a stipulated service period, on an exit and/or for meeting performance/profitability targets. If the value of the shares goes on to increase, employees may be able to sell their shares at a later date for a profit.

Our Corporate Solicitors explain everything you need to know about EMI Schemes.

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Main reasons to use an EMI scheme

Tax benefits for the company/employees

In the tax year ending 2023, EMI schemes resulted in £500 million of tax relief.

When EMI options are exercised, a corporation tax deduction equal to the gain made by the employee may be available for the company under Part 12 Corporation Tax Act 2009.

In addition, employees will be charged no income tax or National Insurance Contributions (NICs) on the grant of EMI options or on exercise (provided that the exercise price is equal to or above the market value of the shares on the date of grant). On disposal, capital gains tax will be chargeable on any gains, but business asset disposal relief (BADR) will apply as long as the shares are sold two years or more after the grant of the option and the holder has been a director or employee for two years or more prior to the sale.

Cultural benefits for the company

Along with boasting a tax advantage, EMI schemes can lead companies to enhance the recruitment and retention of their employees, as they can offer employees financial rewards above and beyond their basic salary.

Flexibility

EMI schemes can be tailored to a company’s needs, with the employer themselves being able to decide the exercise price (subject to tax advice) and number of EMI options to be granted, as well as any conditions related to employee eligibility.

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Impact of Autumn 2024 Budget on EMIs

In October 2024, the Autumn Budget set out the increase in the main rate of CGT from 10 to 18% for basic-rate taxpayers and from 20% to 24% for higher-rate taxpayers.

Meanwhile, on 6 April 2025, the BADR rate will increase from 10%to 14%, before increasing again to 18% on 6 April 2026. Notwithstanding these changes, there is still a tax benefit for companies proceeding with EMI Schemes.

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Legal requirements to introduce an EMI share option plan

Requirements for an EMI scheme

Various statutory requirements must be met at both the time of grant of EMI options and throughout the life of an option. Care must be taken to ensure that the requirements are met, as failing to meet them would be classed as a disqualifying event, resulting in a restriction of the tax relief available when the option is exercised.

EMI schemes can only apply to:

Qualifying companies

A company must:

  • have a permanent establishment in the UK;
  • be independent of other companies and have only qualifying subsidiaries;
  • be a trading company or parent of a trading group;
  • have gross assets of £30 million or less at the time of grant;
  • have fewer than (the equivalent of) 250 full-time employees at the time of grant; and
  • not work in ‘excluded activities’, such as banking, farming, property development or legal services provision.

Qualifying shares

EMI options can be satisfied by either issuing new shares or transferring existing shares. However, the shares must be fully paid up, non-redeemable ordinary shares.

Qualifying employees

There are additional stipulations as to who can be granted EMI options. For example, employees must work for the company for a minimum of 25 hours per week, or if less, 75% of their working time, or have no other remunerative employment or self-employment.

Qualifying options

EMI options must be exercised within ten years of the grant and be set out in a written option agreement, which in turn must meet several requirements. These include setting out details of the grant date, the number (or maximum number) of shares under the option, and the exercise price or method for determining the exercise price, and how and when the option can be exercised.

In addition to the above, there are certain statutory limits on the grant of EMI options, including that:

  • an employee may not hold unexercised EMI options over shares with a total value in excess of £250,000
  • employees that have been granted EMI options over shares with a total value of £250,000 cannot be granted further EMI options for a further period of 3 years
  • the total value of all unexercised EMI options must not exceed £3 million at any time.

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Notwithstanding the various tax changes introduced in last year’s Autumn Budget, EMI schemes remain an attractive option for many companies.

However, businesses ought to ensure that the schemes are not only suitable for them, but that they go about operating the schemes correctly and should seek accounting/tax advice prior to taking any steps to introduce an EMI scheme.

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Our Corporate team is experienced in helping implement EMI schemes, so get in touch if you would like advice on preparing a share option scheme for your business.

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Oliver Hinds's profile picture

Oliver Hinds

Trainee Solicitor

Oliver is a Trainee Solicitor and is currently undertaking his third seat in the Corporate department.

Furthermore, Oliver is a Health and Wellbeing Director at Manchester Trainee Solicitors Group (MTSG), as well as a member of the Northern Trainee sub-committee of the Society for Computers and Law (SCL).

Prior to joining Myerson Solicitors in September 2023, Oliver graduated from Durham University with a 2:1 degree in Law. He later completed the Legal Practice Course with Distinction.

About Oliver Hinds