HMRC 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.