EMI – share option schemes
EMI (Enterprise Management Incentive) is a government‑backed, tax advantageous, share options scheme for employees that is used by over 10,000 businesses in the UK. The vast majority of SMEs distribute shares to employees in this way.
Why do businesses give EMI share options to employees?
- Attract and retain the best people
- Align interests by giving employees a sense of ownership
- Reward those who help you grow the business by enabling them to share in its success
- Benefit from a more committed and engaged workforce, proven to outperform businesses that don't share ownership
What is an EMI share option scheme?
This scheme not only allows you to reward your employees with share options with massive tax advantages, but also allows you to offset both the cost of the scheme, and the tax benefits achieved by your employees against your company’s tax liability. If you’re sharing ownership with your employees, an EMI scheme makes a lot of sense because of its tax efficiency.
What are the main advantages?
- The scheme is relatively flexible, in terms of the conditionality and timeframes that can be set as part of its terms to the employee
- No tax is payable when the options are issued. On exercise, income Tax is only payable on the difference between what the employees pay for them (the exercise price) and their value when the options were originally awarded
- Recipients will have to pay Capital Gains Tax when they sell their shares, but at a lower rate than normal. This is because you can get Entrepreneurs’ Relief with EMI shares which means you only pay tax at 10% rather than the usual 20%
- Likely to be the most tax efficient scheme for employees (people who spend more than 75% of their time at your business)
- You can set conditions for recipients, such as achieving milestones, or staying with the company for an agreed period of time
- The company can offset the costs of the scheme, as well as the tax benefit achieved by the employee between their exercise price and the share value when exercised against their own profits as a corporation tax relief
What are the main disadvantages?
There are a number of criteria that must be met for the company and the employees to be applicable, and a number of processes that must be followed to ensure that they remain so.
You cannot award EMI shares to non‑employees.
What are the qualifying criteria and limits?
For the business
- For businesses up to 249 employees
- Max business value of £30m
- Companies that work in ‘excluded activities’ aren’t allowed to offer EMIs. Excluded activities include: banking, farming, property development, provision of legal services, ship building and leasing
- All recipients must be spending at least 25 hours per week or, at least 75% of their working time, as an employee of the company
- The employee must not hold more than 30% of the shares of the company
- The market value of the option (including all other share options) must not exceed £250,000 per employee, at the date of grant
For the Options
- The shares must be ordinary, non-redeemable shares
- They can be voting or non-voting
- The options must be exercisable within 10 years of grant or on exit
We often get questions whilst helping customers set up their EMI share scheme. Here are the most common, which might clear a few things up while you explore your options. If you need further explanation or have additional questions we’d love to help. Speak to one of our experts for free...
What happens if you give a team member shares and they leave?
This decision is typically at the board’s discretion and you can either cancel the option or allow the leaving team member to keep them.. If they are no longer an employee they will lose the EMI tax benefits and pay income tax on any gain over the exercise price rather than CGT (at entrepreneurs relief). There’s a full share scheme tax comparison chart in the guide. (This process is incredibly easy to manage using Vestd)
What if an employee exercises their options, how do buybacks work?
Once an employee has exercised their shares, they become a legal shareholder and buybacks will work in accordance with your articles. This almost always gives the existing shareholders first rights. There is no open market for Ltd company shares to be traded on.
Are my current articles of association compatible?
If you have standard ‘model’ articles then yes, in most cases these are sufficient for issuing ‘exit only’ EMI options. If however, you’d like to issue options that are exercisable before an exit event then you should ensure your articles include ‘drag and tag’ provisions. If you don't have these you can use the Vestd articles for free which include this.
Should there be any conditionality or performance criteria for vesting?
Each EMI option award can include a unique and specific set of qualifying criteria. This could be as simple as ‘turn up each day’ or more specific and linked to key milestones like helping the business meet specific targets. What’s most important is that the criteria is clear and not subjective.
How do Vesting schedules work?
Typically, when businesses use vesting schedules they set a years cliff (i.e. no shares can vest until after the first 12 months) and then the shares vest proportionally over a 3-5 year period. Some businesses like to get creative and front or back load the vesting and others like to increase the vesting frequency to quarterly or monthly. (All of this is simple to create and manage using Vestd)
When should employees be able to buy their shares?
The choices are either ‘on exit’ or after a set time (but within 10 years). 80% of companies tend to choose ‘on exit’ and around 20% will set a specific time depending on their rationale and objectives for sharing ownership. (The team at Vestd would be happy to share insight)
Is an EMI definitely right for me given my specific situation?
Depending on your situation you might also want to consider Growth Shares or Unapproved Options. Speak to one of our experts (for free) to better understand what might be best for your situation.
Do I need a valuation?
Yes, all EMI schemes need a valuation that is pre approved by HMRC.
Who does my valuation and how much does it costs?
Typically your accountant is best placed to produce this and will make the submission. It may also be that you can do this yourself, depending on the status of your business.
What exercise price should be set for the shares?
Typically you would either set the exercise price at the value of the shares at the time as agreed with HMRC, or at their nominal value (the lowest possible price). This is a commercial decision for the business and will depend on specific circumstances. (Speak to one of our share scheme experts about this)
Got more questions?
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Give Vestd a try!
Vestd is the UK’s first share scheme management platform for SMEs.
It is the easiest, simplest and most cost effective way to create an EMI share scheme for your business.
It was a combination of extremely knowledgeable support and really simple and intuitive technology. You’ve massively simplified the whole share scheme process for everyone involved.
Why use Vestd?
- You can easily set up an EMI share scheme for a fraction of the cost typically charged by lawyers and accountants, spread over time.
- Free guidance and support to help you understand all the options.
- Issuing shares and granting options is easier than doing your payroll.
- You can set conditions for your team that must be met for them to receive their shares.
- Our web interface is simpler to use than online banking.
- All agreements are automated and digitally signed off by shareholders and stored with instant access, so no paperwork.
- Maximise your tax efficiency and ensure you stay legally compliant.
- Manage every transaction in one place, including ordinary share movements.
- Shareholders can view their shares and documents online.
Launching a share scheme doesn’t have to be a headache...
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Simple, fast and trustworthy
Our platform is the easiest and fastest way to create and manage your EMI share scheme.
We help businesses to become legally compliant and able to issue shares within a week, and will show you how to minimise the tax liability for everyone involved.
Seriously cost effective
Vestd allows companies to distribute shares without having to pay the vast set up and management fees typically charged by lawyers and accountants.
Vestd charges just £100 a month for businesses with up to 25 employees.
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Vestd makes the world of options simple. It’s a one stop shop for anyone looking to bring other people into their project.
The combination of smart online tools and outstanding personal support. This platform makes something which should be relatively simple come back to being simple.
My experience with Vestd has been really fantastic. They have an amazing digital experience but have also added great "human" customer service to guide you through the process.