EMI scheme: What you need to know
An EMI scheme is an employee share scheme which is government approved, tax beneficial and a flexible way of incentivising your staff. It enables employers to reward employees for their efforts and to incentivise and retain staff.
EMI scheme share options give employees statutory tax relief on their financial gains and can be particularly suited to smaller and medium sized companies.
With EMI scheme share options, a company’s UK employees can acquire shares by first being granted options to acquire them. Statutory tax relief means that they do not pay any income tax or NI on their gains.
Does my company qualify?
- EMI schemes can be used by independent quoted or unquoted companies with gross assets of £30m or less
- A company or group must have fewer than 250 full-time equivalent employees
- All employees must work a minimum of 25 hours a week or 75% of their total working time for the company
How does the EMI scheme work?
Key employees of your choice can be offered an EMI scheme option to buy shares in your company, usually from a certain point in the future. If the employee decides to exercise the option (buy the shares), the price that they pay for those shares will usually be their value at the time the option was granted.
In most instances, when the option is exercised, the value of the shares will have risen, so the employee will effectively be paying a discounted price.
There’s no obligation for an employee to exercise an option, so if the share value doesn’t increase then the employee would be unlikely to exercise.
What are the tax implications for employees?
Where an employee accepts the initial grant of EMI options, no income tax or NICs are due.
On exercise of the option, if the exercise price is equal to or above the actual market value (AMV) of the shares at the date of grant of the EMI option, the employee will have no income tax or NI liability arising.
when the shares are sold, capital gains tax (CGT) will be payable on the gain arising, although the CGT rate for EMI options can be at a discounted Entrepreneur’s Relief level of 10%, as opposed to the normal rate of 20%.
What about if a participant considers leaving the scheme?
Employers can pre-empt this and to encourage participants to stay with the company, they can:
- Stipulate that unexercised options will lapse if an employee leaves; or
- Allow them to exercise if they were leaving only for “good reasons”; or
- Allow options to be exercised in stages, after certain time periods had elapsed.
Employees whose options lapse will never enjoy any benefit from holding their option.
Other than tax, what are the other benefits for businesses?
EMI scheme options provide a very tangible incentive for key employees to stay with the company. The prospect of a significant profit within a foreseeable period strongly encourages retention and dedication of staff, especially as most option agreements provide that options lapse automatically when an employee leaves.
Employees are more likely to feel aligned with the interests of shareholders and the board if they have a tangible interest in the company’s ownership – at some point they will see rewards for the effort that have put in.
Having share options can make employees feel appreciated. Share options are a benefit that can be given alongside the normal salary package, but they also look to the longer term. They demonstrate a commitment from the employer to the employee that everyone is in it for the longer term and it is in everyone’s interests to help and grow the business.
Get in touch
Cowgills is a leading independent firm of Chartered Accountants and Business Advisors based in the North West of England – from Greater Manchester to Liverpool. We use our sector experience to deliver tailored financial solutions and support for businesses.
If you need help with any of the above, get in touch with your Cowgills contact or visit our website.
The information was correct at time of publishing but may now be out of date.