EMI SchemeMany small and medium company owners would like to reward and incentivise key employees by awarding them shares in the company. But they are often put off by the complexity and cost, by tax issues, and by anxieties over giving up control of the company.

Enterprise Management Incentives – or EMI share options – may well be the answer.

This article describes what EMI schemes are and how EMI share options can be best utilised.

What are EMI scheme and EMI share options?

A share option is a right to acquire shares in a company, on terms set out in an option agreement. This will specify how many shares an employee may acquire, how much he or she will have to pay for the shares, and when the shares can be acquired through exercise of the option.

Option exercise may occur, for example, after a specified period of employment, or upon the achievement of performance targets, or upon the sale of the company.

Why have EMI schemes?

Especially for a small entrepreneurial company, where cash is often tight, shares or share options can be an important part of the package in attracting high caliber employees. An employee who sees potential for realising a significant lump sum through sale of shares may well be persuaded to join a company, even if the cash salary is less than that on offer from larger companies.

Employee share ownership helps to align the interests of a company’s owners with that of employees. All are looking to increase shareholder value through growing the business, in the hope that they will eventually benefit through sale of their shares or through receiving dividends.

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Should employees have EMI share options or shares?

There is no certain answer to this. In some cases, it will make sense for employees to have shares from the outset. However, this will generally involve employees having to pay for their shares, or suffering a tax charge if their shares are gifted or bought at less than full value.

Having share options can provide more of an incentive than having shares, if the share options are only exercisable upon achievement of targets. And many companies prefer employees not to have shares from the outset, because of complications if employees leave. So, more often than not, the preferred solution is share options rather than upfront shares.

How are EMI share options taxed?

There is no tax charge when share options are granted. However, for an “unapproved” share option, i.e. an option without the special tax benefits of EMI or other approved share plans, income tax and possibly National Insurance is charged when the option is exercised. And when the shares are sold, capital gains tax may be payable on any growth in value since option exercise.