What are EMI Share Option Schemes?

The Enterprise Management Incentive (EMI) Share Scheme is a low-risk tax advantaged share option scheme that is designed for smaller companies who wish to reward their employees. It was introduced in 2000 to assist growing companies in attracting and retaining key employees and to reward those employees for taking the risk to work for such companies that may not be able to match the salaries paid elsewhere.

The EMI Share Scheme can help to align the interests of the company owners with those of the employees as it is in everyone’s interest to increase shareholder value through growing the business. This is in the hope that they will eventually benefit through the sale of their shares.

If a company works in an ‘excluded activity’, they aren’t allowed to offer EMIs. Excluded activities include:

  • Farming
  • Banking
  • Property development
  • Ship building
  • Provision of legal services

If a company works in an allowed activity and has assets of £30 million or less, they may be able to offer Enterprise Management Incentives (EMIs). To qualify, the company must also be independent (i.e. not controlled by another company) and have fewer than 250 employees or full-time equivalents. A maximum of £250,000 in share options can be granted per employee in a 3-year period. A maximum of £3 million in share options can be granted across the whole company in total. Share options are rights to acquire shares in a company, on terms set out in a share option agreement. The share option agreement will specify the number of shares an employee can acquire, how much they will have to pay for the shares and when the shares can be acquired through exercise of the option.

Option exercise can either occur after a specified period of employment, upon the achievement of performance targets, or upon the sale of the company.

The price of the shares under option is fixed when the options are granted and notified to HMRC. Employees will not have to pay Income Tax or National Insurance providing they buy the shares for at least the market value they had when the option was granted. If an employee was given a discount on the market value of the shares, they will be required to pay Income Tax or National Insurance on the difference between what they paid and what the shares were worth.

Employees may also have to pay Capital Gains Tax if they make a profit when they sell or dispose of the shares. However, Capital Gains Tax is usually charged at a reduced rate of 10% under the EMI Share Scheme. Whether they will be required to pay Capital Gains Tax depends on if the total gains are above the Capital Gains Tax Allowance for the tax year in which they sell the shares.

Employees can qualify for receiving EMI share options if they are engaged to work at least 25 hours per week for the company or, if less, for at least 75% of their working time. However, an employee who already owns over 30% of the company can not qualify for the EMI Share Scheme.

To get started with the EMI Share Scheme, the fist step is to decide on the following:

  • Which employees will be granted share options and over how many shares?
  • When should the share options be exercisable? This could be based on performance targets or occur only when the company is sold.
  • What type of shares should be granted in the share options? This could be ordinary shares, or a special share class designed for share option under the EMI Share Scheme.
  • What amount will employees have to pay to exercise their share options and acquire their shares?
  • What would happen if an employee who holds share options leaves the company?

Once answers to the above questions have been decided, formal EMI share option agreements should be prepared which detail all the relevant terms and conditions. The share options can then be formally granted once the agreements have been signed by the company and the employees.

HMRC must be notified within 92 days of all share options that have been granted.

Accounts Lab are experts in the EMI Share Scheme and can help you with the scheme framework, securing approval of your shares with HMRC, implementing the scheme within your company, drafting the required plan rules and legal contracts as well as providing you with ongoing support and guidance throughout the process.

For more information on the Enterprise Management Incentive (EMI) Share Scheme, please do not hesitate to contact us.