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07 April 2022

EMI Scheme | Share Option Advantages


FREQUENTLY ASKED BUSINESS QUESTION


Q&A Session

I am looking for a method to retain some key employees as they are vital to the continued success of my business and I’ve been told to consider giving them the opportunity to participate in an EMI Scheme – an Enterprise Management Incentive Scheme. Can you explain what the benefits of this would be and if my company would be eligible?


TAX TIP


What is the EMI Scheme?

The Enterprise Management Incentive EMI scheme is a share option scheme designed for Small Medium Enterprises, which enables businesses to grant employees the opportunity to acquire shares in their employing company, on advantageous terms at a later date, based on today’s share price.

Benefits of an EMI Scheme?

From an employee’s perspective, the potential to share in the future capital growth of their employer company is a powerful incentive to remain focused on the goals and targets of the business and a chance to share in the rewards of their own efforts.

For the employer, the alignment of the employee’s interests with those of the shareholders can only have a positive impact on employee motivation and loyalty also.

The tax benefits available under the EMI Scheme legislation are extremely generous, with no Income Tax or National Insurance Contributions due either at the date the employer grants the Share Options to the employee nor when the employee exercises their options to purchase the shares.  The company can claim a Corporation Tax deduction when the employee exercises their option to purchase shares.

Also, once the employee has acquired the shares, they generally only give rise to Capital Gains Tax when the shares are eventually sold, allowing employees to benefit from capital gains tax rates, which can be as low as 10% rather than income tax and national insurance rates on salary increases which are often in excess of 50%.

You can be selective of which employees you want to join the scheme, therefore offering that flexibility to retain those who are key to the business.

Conditions for an EMI scheme

Given the generosity of the scheme there are a number of conditions that both the company and the employee must satisfy. A few of these are: –

  • unquoted companies with gross assets of £30m or less,
  • qualifying trade i.e. farming, financial activities and property development trades are non-qualifying,
  • company must not be controlled by another company,
  • employee works for at least twenty-five hours a week, and
  • employee does not already own more than thirty percent of the equity in the business.

Should the company or employee not qualify for the EMI Scheme, there may be alternatives available. While they are unlikely to attract the same tax benefits, they could still incentivise employee engagement and loyalty.

In summary, the share option schemes are a good way to reward employees and EMI Schemes in particular are tax-efficient.  Prior to signing or agreeing on any terms, it is advisable to get independent advice in relation to scheme parameters and keeping up to date with filing deadlines as they could jeopardise the favourable tax treatment if done incorrectly.

Here to Help

Contact FPM

The team at FPM are here to help with all your finance and tax queries. If you need advice or assistance in setting up an EMI Scheme, please contact our Tax Team.

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The advice in this column is specific to the facts surrounding the questions posed.  Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies. 

Contact KellyAnne

KellyAnne Murtagh / Senior Tax Manager

k.murtagh@fpmaab.com

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