emi share optionsHMRC statistics show approximately 3,000 companies a year grant Enterprise Management Incentive (EMI) options to employees.

They are a proven incentive for employees, and companies that do not offer options may be at a competitive disadvantage in recruitment. If your company has yet to implement an option plan, maybe now is the time to consider it.

What is an EMI share option?

An EMI share option is a right to acquire shares in a company at a discounted price. The discount is usually the market value of the shares at the time the option is granted. EMI share options are designed to help small and medium-sized enterprises (SMEs) attract and retain key employees.

Who is eligible for EMI share options?

To be eligible for EMI share options, a company must:

  • Have gross assets of no more than £30 million
  • Have no more than 250 full-time employees
  • Be a trading company or a holding company of a trading group

What are the tax benefits of EMI share options?

There are a number of tax benefits to EMI share options, both for the employee and the company. For the employee, there is no income tax or National Insurance contributions (NICs) payable on the grant or exercise of EMI share options. This means that the employee can benefit from the full potential growth in the value of the shares without having to pay any tax on the way.

For the company, the grant of EMI share options is not a taxable event. This means that the company can deduct the value of the options from its profits for tax purposes.

How do EMI share options work?

EMI share options are granted by the company to the employee. The option agreement will set out the terms of the options, such as the number of shares that the employee can acquire, the exercise price, and the vesting period.

The employee can exercise the options at any time during the vesting period. However, the employee will only be liable to pay tax on the difference between the exercise price and the market value of the shares on the date of exercise.

What are the risks of EMI share options?

There are a number of risks associated with EMI share options, such as:

  • The value of the shares may not increase.
  • The company may not be successful.
  • The employee may leave the company before the options vest.

Should I consider EMI share options?

EMI share options can be a valuable incentive for employees. However, it is important to carefully consider the risks before you decide whether or not to grant EMI share options to your employees.

If you are considering EMI share options, you should speak to a qualified tax advisor to get advice on whether or not they are right for your company.

Here is an example of how EMI share options can work:

  • A company grants 100 EMI share options to an employee at an exercise price of £10 per share.
  • The market value of the shares at the time of grant is £15 per share.
  • The employee exercises the options after three years, when the market value of the shares is £20 per share.
  • The employee will pay £10 per share for the shares, so they will have a gain of £10 per share.
  • The employee will only be liable to pay tax on the gain of £5 per share, which is the difference between the exercise price and the market value of the shares on the date of exercise.

In this example, the employee will have a net gain of £500 after paying tax on the gain. This is a significant amount of money, and it can be a valuable incentive for employees to stay with the company and help it to grow.

Further more detailed information can be found on our blog: EMI Share Scheme Options: Ultimate Guide

Share Options Comparison

The true comparison is between EMI and unapproved options, where the tax “gain” is obvious.  In the example below it assumes options are granted with an exercise price of £10k, being the market value of the underlying shares as at the date of option grant, and that the shares are sold for £100k immediately following option exercise.

Upfront Share Purchase

£74,000Net Gain
  • Share Sale Proceeds = £100,000
  • Capital Gains Tax = £16,000
  • PAYE / National Insurance = n/a

EMI Option

£82,000Net Gain
  • Share Sale Proceeds = £100,000
  • Capital Gains Tax = £8,000
  • PAYE / National Insurance = n/a

Unapproved Option

£41,000Net Gain
  • Share Sale Proceeds = £100,000
  • Capital Gains Tax = n/a
  • PAYE / National Insurance = £49,000

The upfront share purchase is less unfavourable in tax terms, but would involve the employee having to finance the upfront cost of £10k with no certainty that he or she would ever be able to sell the shares.  Also denies the employer company the opportunity of allowing option exercise only, for example,  upon the occurrence of a takeover or the achievement by the employee of performance targets.

How We Can Help With Your EMI Scheme

Working with you we will:

  • Determine whether your company qualifies to grant EMI options
  • Design your EMI scheme, including such matters as when EMI options can be exercised, and whether EMI options should be over a separate share class
  • Prepare guidance notes for employee participants and, if required, attend employee briefing meetings
  • Agree an EMI option scheme share valuation with HM Revenue & Customs
  • Review your company’s Articles of Association and, if necessary, make revisions to accommodate employee shareholders
  • Prepare all EMI option scheme rules and option agreements
  • Prepare board minutes and any necessary shareholder resolutions to allow EMI options to be granted
  • Make any necessary filings at Companies House
  • Report the EMI option grant to HM Revenue & Customs
  • Assist you in preparing and filing annual EMI option scheme returns
  • When the time comes, advise on procedures for EMI option exercise and accounting for tax

Contact us for more information on EMI Scheme or any other tax questions you have.

Further Reading

EMI Share Scheme Options: Ultimate Guide