EMI Options Scheme

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Enterprise Management Incentive options, usually referred to as EMI options, are one of the most powerful and tax efficient ways for UK businesses to reward retain and motivate key employees. In my experience they are also one of the most misunderstood. Many business owners have heard the term mentioned by advisers or peers but assume it is only relevant to large technology companies or fast growth start ups. Others assume it is complex risky or only useful if a sale is guaranteed.

The reality is very different. EMI options are designed specifically for small and medium sized UK companies. They are flexible they are well supported by HMRC and when implemented properly they can align employee motivation with long term business growth in a way that cash bonuses rarely achieve. They also offer significant tax advantages for both the company and the employee when compared with other share based rewards.

In this article I want to explain EMI options clearly and practically. I will cover what EMI options are how they work who can use them the tax treatment for both employer and employee and the common pitfalls to avoid. This is written from real world experience advising owner managed businesses rather than from a purely legal or academic perspective. By the end you should have a solid understanding of whether EMI options could work for your business and how they fit into a wider growth strategy.

What EMI options actually are

An EMI option is a tax advantaged share option granted by a qualifying company to a qualifying employee. It gives the employee the right to acquire shares in the company at a fixed price at a future date or on the occurrence of a specific event such as a sale of the business.

The key point is that the employee does not receive shares immediately. They receive an option. That option only turns into shares if certain conditions are met and if the employee chooses to exercise it.

This structure allows businesses to reward future contribution rather than past service. It also allows employees to benefit from growth in the value of the company without needing to invest cash upfront in most cases.

Why EMI options exist

EMI options were introduced by the UK government to help smaller companies compete for talent. Many growing businesses cannot afford to pay market leading salaries especially in early stages. EMI options allow them to offer employees a stake in the future success of the business instead.

From a policy perspective EMI options encourage entrepreneurship innovation and long term growth. From a business perspective they help attract retain and motivate people who are critical to success.

Unlike some tax reliefs EMI options are well established and widely supported. HMRC provides clear guidance and the rules have been refined over many years.

Who can use EMI options

Not every company can grant EMI options and not every employee can receive them. There are qualifying conditions that must be met.

To qualify the company must be:

• A UK trading company or the holding company of a trading group
• Independent and not under the control of another company
• Carrying on a qualifying trade
• Have gross assets of £30 million or less
• Have fewer than 250 full time equivalent employees

Certain trades are excluded such as banking insurance property development and some leasing activities. Most trading businesses in technology services manufacturing and professional sectors qualify.

Which employees can receive EMI options

EMI options can only be granted to employees. They cannot be granted to non executive directors consultants or contractors.

The employee must:

• Work at least 25 hours per week for the company or
• Spend at least 75 percent of their working time working for the company

There is also a limit on the value of options an individual can hold. The maximum value of shares under EMI options for any one employee is £250,000 measured at the date of grant.

The company itself also has a limit. The total value of shares under EMI options across all employees cannot exceed £3 million.

What shares can be used for EMI options

The shares subject to EMI options must be ordinary shares. They must not carry preferential rights to dividends or capital.

However it is possible to create a specific class of ordinary shares with tailored rights provided they still meet the definition of ordinary share capital. This is often done to protect existing shareholders while still offering meaningful upside to employees.

The flexibility around share classes is one of the strengths of EMI options when structured correctly.

How EMI options work in practice

The basic process for implementing EMI options follows a clear structure.

First the company confirms it qualifies. This often involves a review of trade activities ownership structure and employee numbers.

Second the company agrees the value of its shares. This is critical because the tax treatment depends heavily on the valuation at the date of grant.

Third the company grants options to selected employees under formal option agreements.

Fourth the company notifies HMRC of the grants within the required timeframe.

Finally the options sit in place until they are exercised or lapse.

Each of these steps requires care but none are insurmountable with proper advice.

Valuing the company for EMI purposes

Valuation is one of the most important aspects of EMI options. The value agreed at the date of grant determines the exercise price and has a direct impact on future tax outcomes.

In most cases companies agree a valuation with HMRC in advance through the Shares and Assets Valuation team. This is known as agreeing a market value and if relevant an unrestricted market value.

Agreeing the valuation upfront provides certainty. It significantly reduces the risk of disputes later when options are exercised or shares are sold.

The valuation process considers factors such as:

• Current profitability or losses
• Growth prospects
• Comparable companies
• Recent investment activity
• Assets and intellectual property

While it may feel daunting this process is routine for HMRC and experienced advisers.

Exercise price and why it matters

The exercise price is the price the employee pays to acquire the shares when they exercise the option.

This can be:

• Equal to the agreed market value
• Lower than market value
• In some cases nil

The exercise price chosen has tax implications.

If the exercise price is at least equal to the market value agreed with HMRC there is usually no income tax or National Insurance when the option is exercised.

If the exercise price is lower than market value there may be income tax on the discount unless specific conditions are met.

Getting this right at the outset is crucial.

Tax treatment for employees

One of the main attractions of EMI options is the favourable tax treatment for employees.

In many cases the tax position looks like this:

• No income tax or National Insurance when the option is granted
• No income tax or National Insurance when the option is exercised provided the exercise price was at market value
• Capital Gains Tax on sale of the shares

This means that instead of paying income tax at up to 45 percent plus National Insurance employees may pay Capital Gains Tax at a much lower rate on growth in value.

In many cases Business Asset Disposal Relief may apply reducing the Capital Gains Tax rate to 10 percent on qualifying gains.

This is a significant benefit and one of the reasons EMI options are so attractive.

Tax treatment for the company

From the company’s perspective EMI options are also tax efficient.

The company does not usually pay employer National Insurance when options are exercised if structured correctly.

In addition the company may be able to claim a corporation tax deduction equal to the gain realised by the employee on exercise of the option even though no cash is paid out.

This deduction can be valuable particularly in profitable years.

When EMI options can be exercised

EMI options can be structured to be exercisable at different times.

Common triggers include:

• A sale of the company
• An IPO
• Completion of a specific period of service
• Achievement of performance targets

Options can also be granted with a long exercise window allowing flexibility.

This allows businesses to align rewards with long term goals rather than short term results.

Leaver provisions and protection for the business

One concern business owners often raise is what happens if an employee leaves.

EMI option agreements can include detailed leaver provisions. These define what happens to options if someone leaves and whether they are treated as a good leaver or a bad leaver.

This protects the business and ensures that equity rewards those who contribute to success over time.

EMI options and company culture

Beyond tax and mechanics EMI options can have a powerful cultural impact.

When employees have a genuine stake in the business they often think differently. They are more aware of costs more focused on growth and more aligned with shareholder interests.

However this only works if EMI options are explained properly. Employees need to understand what the options mean what they are worth and what risks are involved.

Clear communication is essential.

Common misconceptions about EMI options

There are several misconceptions I see repeatedly.

One is that EMI options only work if a sale is guaranteed. In reality they create optionality rather than obligation.

Another is that EMI options mean giving away control. In practice option holders usually do not have voting rights until they exercise and even then share classes can be structured to protect founders.

A third misconception is that EMI options are too complex for small businesses. With the right advice they are very manageable.

Common mistakes to avoid

Some common mistakes include failing to agree a valuation with HMRC granting options to non qualifying individuals missing HMRC notification deadlines and using poorly drafted option agreements.

Another frequent mistake is not aligning EMI options with a broader remuneration strategy. Options work best as part of a package rather than in isolation.

HMRC notification and compliance

Once EMI options are granted the company must notify HMRC within 92 days of the grant.

Failure to do this can result in the options losing their tax advantaged status.

There are also ongoing reporting obligations including annual returns detailing options granted exercised or lapsed.

While this adds admin it is manageable and well supported by online systems.

EMI options and exit planning

EMI options are particularly powerful in exit scenarios.

When a company is sold EMI option holders can exercise their options immediately before the sale and sell their shares alongside other shareholders.

This aligns employee rewards directly with exit value and avoids the need for separate bonus negotiations.

From a buyer’s perspective EMI options are also familiar and generally well understood which reduces friction during transactions.

EMI options compared with other share schemes

There are other share schemes available such as CSOP options growth shares and unapproved options.

EMI options are generally the most tax efficient and flexible for qualifying companies. Where a company does not qualify alternatives may still work but the tax treatment is usually less favourable.

Choosing the right scheme requires careful consideration of company size growth plans and employee profile.

The role of professional advice

Implementing EMI options involves legal tax and valuation considerations. While the scheme itself is HMRC approved the details matter.

Professional advice helps ensure:

• The company qualifies
• The valuation is robust
• The documentation is correct
• Deadlines are met

This reduces risk and ensures the intended tax benefits are achieved.

Reviewing and managing EMI options over time

Once in place EMI options should not be forgotten.

As the business grows valuations change and new employees join the scheme may need to evolve.

Regular review ensures the scheme remains effective and aligned with business goals.

EMI options for growth focused businesses

From my experience EMI options are particularly effective for growth focused businesses where long term value creation is the goal.

They encourage employees to think like owners and support sustainable growth rather than short term gains.

Used well they can be transformational.

Final thoughts

EMI options are one of the most generous and well designed incentives available to UK businesses. They offer significant tax advantages align employee and shareholder interests and support long term growth.

They are not suitable for every business and they require careful implementation but for qualifying companies they are often a powerful tool.

From my experience businesses that take the time to understand and implement EMI options properly gain more than just tax efficiency. They build stronger teams clearer alignment and a shared focus on success.

When structured thoughtfully EMI options are not about giving away value. They are about creating more of it together.

You may also find our guidance on employee ownership trusts and transferable ownership useful when exploring related accounting topics. For a wider collection of plain English explanations, you can visit our knowledge hub.