What is an EMI scheme?

For many businesses, the key to success lies with the people who join your company as employees - yet finding quality talent and then retaining it can be a challenge in itself.

In an increasingly competitive marketplace, more employers are turning to Enterprise Management Incentive (EMI) Schemes as a key benefit of employment. These schemes offer a chance for employees to invest in your company. They can help to incentivise your people and create a culture where everyone is more motivated towards the success of the company.

What is an EMI scheme?

An Enterprise Management Incentive scheme (EMI scheme) is a tax-efficient way of incentivising key staff in the business by allowing them to receive share options in the company.

Share options grant employees the right to purchase shares at a later date, based on a predetermined price. So on the date the shares are issued, the business valuation at that date will determine the share price that employees can take advantage of. 

This means employees have the right to purchase shares at the predetermined price at some point in the future. Say you set up this scheme in 2022, and now two years later share prices have increased (because the value of your company has also increased), employees can still buy shares at the original cost.

An EMI scheme is very flexible. It allows you, the employer, to dictate when, and crucially on what conditions, an employee can exercise their options to purchase the shares. It might be:

• At the point of a future sale of the business
• In line with the length of service
• Based on specific performance targets

You are free to set these and design the scheme to fit the business needs. It can also include the employee losing their options if they cease to be employed. A solicitor will draw up the paperwork which formalises the conditions you wish to set. 

What’s in it for employees?

As the price is fixed from the point that the options are granted, this means that the employee is incentivised to assist with the growth of the business from that point in time. So when the time comes for them to purchase shares, employees could get a significant saving on their options compared with market value.

What’s in it for the employer? 

EMI schemes are mainly focused on financial benefits for the employee, but as the employer there are some key advantages:

• EMI schemes help to build a growth mindset within your teams - motivating them to get behind the success of the company
• Employees are incentivised to stay with the company for longer

• EMI schemes build out more meaningful employment benefits, ultimately helping with retention

• They are an alternative to pay rises, which is key for when you are at the salary ceiling and unable to increase salaries without more profit

And remember, more and more businesses are offering EMI schemes as a perk of employment. If you’re not offering them already then it’s likely that your competitors are.

The tax benefits of an EMI scheme

There is no additional tax to pay on the date the share options are granted, as there isn’t an immediate charge to income tax on the employee. This is provided the option price is the market value of the shares on that date and that you can prove this is the case - that’s why it is important to have a formal business valuation completed.

When the employee exercises the options and purchases shares, there is still no charge to income tax. This is the case even if (at this point) the company has grown and the market value has increased. 

This benefit to income tax is specific to a share scheme like EMI. Without this in place (or another tax-advantaged share scheme), the increase in the value of the shares would be chargeable to income tax. It would be charged as if the employee had received a bonus of the same amount.

What happens when the shares are sold?

When the shares are eventually sold, tax is then payable by the employee. At this point, the employer would be subject to capital gains tax on any profit made (between the option price and the sale price), just like any regular shareholder.

Because these proceeds would qualify as capital gain, the employee would also then be able to claim Business Asset Disposal Relief (BADR) should all the relevant conditions be met. This brings their tax liability down to 10% of the sale proceeds received for the shares.

To qualify for BADR, the employee must have owned the options for the two years prior to the sale. Usually, shareholders must own 5% of the ordinary share capital in the company to qualify for BADR, but this percentage ownership limit does not apply to EMI shareholders.

The limits of EMI schemes

Individual/employee limits:

• One person cannot hold EMI options that are valued at more than £250,000 at the point at which they were granted.
• The employee needs to work at least 75% of their working time with the company (i.e. they can’t work 20 hours in this job and 20 hours for another company).
• One person cannot be given EMI options if they already own more than 30% of the shares in the company.

Company limits:

• One company cannot have granted options that are valued at more than £3m at the point at which they are granted.
• The company must be “independent” and can therefore not be under the control of another company. To be under the control of another company means to be a 51% or more subsidiary of another company.

Would you like to know more?

Book a call with Wow's Head of Business Tax, Natalie Howarth, to find out if your business might benefit from implementing an EMI scheme.