Starting an EMI share options scheme: Everything you need to know
An EMI (Enterprise Management Incentive) is a share options scheme for employees of UK-based businesses. EMI schemes are used by over 10,000 businesses.
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What is an EMI?
An Enterprise Management Incentive, or EMI, is a government‑backed, tax-advantageous share options scheme. It is mainly used by small to mid-sized UK businesses looking to share their successes with their team as their company grows.
An EMI allows you to not only reward your employees with options having massive tax advantages, but also 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 share scheme makes a lot of sense because of its tax efficiency.
EMI options schemes are relatively flexible, in terms of both the conditionality and the time frames that can be set as part of their terms. You also have the ability to set conditions for recipients, including performance or length-of-service milestones.
Why do businesses give EMI share options to employees?
EMI option schemes allow businesses to:
- Attract and retain the best people over longer periods of time.
- Align interests by giving employees a sense of ownership in your company.
- Reward those who help you grow the business by enabling them to share in its success.
- Benefit from a more committed and engaged workforce: businesses with shares schemes tend to outperform businesses that don't share ownership with employees.
Additionally, the tax implications of an EMI option scheme are more beneficial to employees than the alternatives, which you can read about below.
What is the difference between an EMI scheme, growth shares, and unapproved options?
Compared to other share option schemes available to UK-based businesses, EMI is the most tax-efficient option for both businesses and employees. Tax is incurred only on the value of the shares at the time of their award rather than at the time of exercise (at which their value may have risen). Additionally, Capital Gains Tax is applied at a lower rate of 10% versus the standard 20%.
The following diagram helps demonstrate the main differences between EMI options, growth shares, unapproved options, and ordinary shares:
Due to its requirements and tax advantages, an EMI share scheme is most attractive to UK-based SMEs seeking to share their success with a small to medium-sized team (under 250 employees).
The Complete Guide to Setting Up a Company Share Scheme – Our complete guide to sharing options with employees, including how to set up and manage an EMI scheme.
What Share Scheme Should I Use for My Team? – Offers advice on which share scheme may be most appropriate for your business based on its size, revenue, and tax implications.
EMI vs. Unapproved Options Calculator – Calculate the projected net benefit to your employees using an EMI scheme or unapproved options.
EMI vs. Growth Shares Calculator – Calculate the projected net benefit to your employees using an EMI scheme or growth shares.
How does a business qualify for an EMI?
A business must meet certain requirements to qualify for an EMI options scheme. In summary, a business will usually qualify for an EMI if it meets the following:
- Has up to 249 employees.
- Has assets of less than £30m.
- Is not majority owned or controlled by another company.
- Is not in one of the excluded industries, including banking, farming, property development, provision of legal services, shipbuilding, or leasing.
There are also eligibility requirements for individual employees:
- They must spend at least 25 hours per week or 75% of their total working time as a company employee.
- They may not hold more than 30% of the company's shares.
- They may not hold options worth more than £250,000 (at the time of grant).
A full list of EMI qualifications for businesses, employees, and options is available on this page.
EMI Eligibility – We have only shared the key EMI criteria above. On this page you can read the full details about qualifying criteria for an EMI options scheme, including qualifications that must be met by your business, its employees, and the issued options.
What does the EMI setup process look like?
Once you have established your eligibility for an EMI share options scheme, your scheme must be created to qualify as an EMI when it is eventually filed with Her Majesty's Revenue and Customs (HMRC).
Typically, after an EMI scheme has been created for a business, the owner must file with HMRC to receive a valuation for approval. This valuation is valid for 60 days. This provides some certainty regarding tax treatment going forward, as long as all due criteria and processes are followed.
Once the valuation is agreed upon, you will need to authorise your employee share pool and receive approval from your board and any shareholders. After this, options may be granted. Finally, your business must register its EMI scheme, options, and recipients with HMRC within 92 days of its first option grant.
This process can be challenging for business owners, who have many other things to focus on. That's why we built Vestd. The Vestd platform can assist with the setup of your EMI options scheme, help you generate a valuation and file it with HMRC, create dynamic vesting schedules, and make the long-term management of your issued options easier. By using our share management platform, you will be able to avoid hassles and unnecessary costs and ensure that your business stays compliant through to exit.
Company Valuation – Learn about the process of manually obtaining a company valuation from HMRC (if you are not using the Vestd platform).
HMRC Notifications – Understand what you must notify HMRC about with regard to your EMI scheme, when, and how often.
Granting EMI Share Options – Learn which decisions you must make before you can grant EMI share options to your team.
EMI Vesting Schedules – Learn about vesting schedules for EMI option schemes, how they work, and the special conditions you may include.
What Vesting Schedule is Right for Your EMI Share Scheme? – Decide how your employee's EMI share options should vest, or if they should become available upon exit only.
Exercising EMI Options – Understand how employees are able to exercise their options as part of an EMI share scheme, whether they are subject to vesting schedules or available upon exit only.
Disqualification and Cancellation of EMI Options – Learn how disqualifying events may impact your share scheme or employee's EMI options, and how options may be canceled in certain special cases.
What are the tax implications of an EMI for my company? What about my team?
Businesses offering EMI options are eligible for a corporation tax (CT) relief if qualifying shares are acquired by employees upon the exercise of an EMI option. The CT relief is typically the difference between what the employee pays for their shares and their value when their options are exercised.
Employees receiving option grants via an EMI scheme are eligible for Entrepreneurs’ Relief at the time of sale. This tax relief allows for a 10% Capital Gains Tax (versus the standard 20%) on any gains on the actual market value (AMV) of shares at the time of grant.
If there is a disqualifying event that causes your business, an employee, or the options scheme to no longer meet the qualifying criteria, the options will lose their advantaged tax status unless they are exercised within 90 days of the event.
For more details on the tax implications of an EMI scheme, we suggest reading one of the pages linked below or seeking advice from your tax professional.
Taxation and Exercise – Read about some of the tax benefits of EMI schemes, as well as the key variables that may affect taxation and exercise of shares.
Taxation on Disqualifying Events – Learn what happens to options issued as part of your EMI scheme if there is a disqualifying event, including an employee's departure from the company or decrease in working hours.
How do I manage an EMI option scheme?
Long term, you will need to manage your EMI scheme by adding new recipients, removing recipients, and updating your cap table to reflect the current options issued.
You will also need to notify HMRC of any changes, such as new option grants, employee departures, or a company exit (buyout or change in ownership).
Managing your EMI scheme on your own can be very difficult and time-consuming. By using our share scheme management platform, you will have access to features that help you manage your scheme without any hassle.
Vestd allows you to:
- Create and submit an EMI scheme using dynamically generated documents.
- Simplify the creation of reminders, relevant files, and submission of notifications to HMRC.
- Create and manage your employee share pool.
- View your cap table in real time.
- Build your own vesting schedules.
- Digitally exercise shares.
- Invite employees to review their options and digitally sign the necessary paperwork.
- Keep employees engaged with your options scheme and communicate the value of the options as your company value grows over time.
Below, you will find some additional information on how EMI schemes are managed with Vestd, including the vesting, cancellation, and exercising of options.
The Complete EMI Share Option Scheme Checklist — We created this checklist for UK-based SMEs so they know what’s involved with creating an EMI options scheme, and can stay compliant throughout their journey.
The Hidden Costs of EMI — When SMEs create their EMI share scheme, they often don't realise how much it costs to be non-compliant. Learn how to invest in an EMI scheme that benefits your employees from day one.
Vestd Customer Stories — Read how Vestd customers are using our simple online platform to manage their EMI option schemes and more easily share equity with their team.
Learn more about EMI option schemes
If you would like to learn more about EMI option schemes, we recommend:
Learn more about Vestd
Vestd is the UK’s share scheme specialist and is authorised & regulated by the FCA (Financial Conduct Authority). Every week, our experts help more UK SMEs create and manage their EMI schemes than anyone else, through our simple to use online platform.
To learn more about how we can help you with your EMI scheme, request a demo with one of our experts now...