EMI schemes: what are they and how do they work?
An Enterprise Management Incentive (EMI) scheme is a type of tax-advantaged employee share scheme. EMI share incentive schemes allow employers to issue share options (the right to acquire shares in a company) to key employees, incentivising them to work hard and make the business a success.
By including vesting provisions (minimum periods of employment) and performance criteria (targets which need to be met), employers can ensure only committed employees are rewarded for their efforts in growing the business.
The EMI scheme provides employers and employees with attractive tax breaks, making it the most common form of share incentive plan for startups and SMEs looking to recruit and retain talented employees.
In this guide, we'll cover:
- Which companies are eligible to offer EMI schemes
- Which employees are eligible to join an EMI scheme
- What type of share options must be granted
- The tax advantages of an EMI scheme
- How you set up an EMI scheme
- Whether you can set up a DIY EMI scheme?
- How much an EMI scheme will cost to set up professionally
- Key terms for employee share schemes
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Which companies can offer EMI share schemes?
In order to offer an EMI scheme, an employer must:
- Be a limited company
- Not be controlled by a parent company
- Have gross assets less than £30 million
- Have fewer than 250 employees
- Be conducting a commercial trade which isn’t excluded (e.g. property investment or banking)
- Have a UK base
Companies may issue up to £250,000 of share options per employee and a total of £3 million unexercised share options to all employees.
If a business doesn’t meet these criteria, they may want to consider an alterative, such as a Company Share Option Plan.
Who is eligible to join an EMI scheme?
In order to join an EMI scheme, employees must:
- Be an employee of the company or a subsidiary
- Spend at least 25 hours a week, or 75% of their time, working for the employer
- Not hold more than 30% of the company
This means consultants and non-executive directors are unlikely to qualify.
What type of share options must the employer grant?
The share options must be:
- For ordinary, non-redeemable, shares in the company
- Fully paid up (i.e. share price paid when issued)
- Capable of being exercised within 10 years of the grant
- Set out in writing
What are the tax advantages of an EMI scheme?
The main attraction of an EMI scheme is the tax advantage it offers employees. As an HMRC approved scheme, employees benefit from paying no income tax and national insurance when the grant is issued and exercised. They also pay a reduced rate of capital gains tax (10% rather than 18% / 28%).
What does this look like in practice?
Let’s compare examples of an employee being granted shares worth £5,000 - which they later sell for £150,000 - under an EMI scheme and an unapproved scheme:
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It’s clear our employee is much better off under an EMI scheme. Not only do they save up to £51,750 in tax in the example above, they don’t have to pay up to £42,750 in tax out of their own pocket when they exercise their options.
Employers are able to deduct the cost of setting up and running an EMI scheme from their taxable income for corporation tax purposes.
Employers are also able to deduct the gain on the shares between the grant and the date of exercise from their taxable income for corporation tax purposes. Using the example above, the company would be able to deduct £95,000 from their taxable income.
How does a company set up an EMI scheme?
The usual steps to setting up an EMI scheme will be as follows:
- Review and, if necessary, amend the company’s articles of association to ensure the EMI share options can be granted.
- Review shareholders agreement and, if necessary, amend agreement or obtain consent from shareholders to grant EMI options.
- Obtain a valuation of the company’s ordinary shares and agree this valuation with HMRC.
- Draft scheme rules and decide whether to include provisions for things like vesting, performance or good/bad leavers.
- Explain EMI scheme to employees and sign written agreements with employees.
- Draft board minutes, hold board meetings and file necessary company admin at Companies House.
- Register scheme with HMRC within 92 days of establishment.
Is it possible to set up an EMI share incentive plan without professional help?
Share incentive plans, such as EMI schemes, are complicated and generally too difficult to set up without professional help. If a business doesn’t obtain professional advice when implementing an EMI scheme, they run the risk the scheme failing to be tax-advantaged (which could cost their employees dearly in tax) and giving shares to employees who don’t pull their weight.
The main reason for setting up an EMI scheme is to incentivise talented employees to join the business and help make it a success. It will therefore come as no surprise that leaving employees with a huge tax bill, or rewarding employees who don’t stick around, will have a negative effect on employee morale and could end up achieving the opposite effect implementing an EMI scheme was intended to achieve in the first place.
How much does it cost to implement an EMI scheme?
Small businesses implementing a simple scheme with a couple of employees can expect to pay around £2,000 to £3,000 plus VAT. Don’t forget though, this is tax deductible for corporation tax purposes. More complex schemes for larger employers are likely to cost significantly more.
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Key terms for employee share schemes
Bad leaver – an employee who ceases working for their employer in circumstances that are defined in a scheme or share option plan as not being a good leaver, usually resulting in the employee losing their rights under the scheme.
CGT – Capital Gains Tax.
Company Share Option Plan (CSOP) – a tax-advantaged discretionary share option scheme. It is usually used for directors, executives and senior management, but can be also offered to any employees.
Discounted option – a share option granted at an exercise price less than market value.
Employment related securities – securities (e.g. shares) acquired by an employee as a result of their employment.
Enterprise Management Incentive (EMI) – a tax-advantaged share option scheme typically used by high-growth SMEs to incentivise talented employees to join a relatively new business.
Employee Share Ownership Plan (ESOP) – a share ownership plan (e.g. CSOP, SAYE, EMI or SIP) that provides employees with direct share ownership.
Exercise Price – the price shares are acquired for (agreed at the grant date) when an employee exercises their share options.
Good leaver – an employee who ceases working for their employer in circumstances that are defined in a scheme or share option plan as not being a bad leaver (e.g. injury, disability, redundancy or death).
Grant date – the date share options are given to an employee (i.e. the employee receives a right to acquire shares in the company).
Lapse – the loss of a share option (i.e. the right to buy shares at the exercise price).
Limited company – a company limited by shares under the laws of England and Wales. A limited company is owned by its shareholders and run by its directors. It is a legal entity in its own right and capable of buying, owning and selling property. A limited company protects its shareholders from liability.
Market value – for listed shares, an average of mid-market prices. Where the shares are not listed, the market value of the shares as determined by having the shares appropriately valued. Employers can agree a market value with HMRC’s Shares and Assets Valuation team for tax purposes.
Nil-cost options – share options which the employee can exercise without paying to acquire the shares.
Nominal value – the face value of a share (e.g. £1), as determined by how the company’s share capital is denominated. The nominal value is not the same as the share’s market value.
Ordinary shares – shares which carry no special rights in the company. Ordinary shares usually carry voting rights and the right to share dividends and capital.
Restricted shares – shares subject to restrictions which may affect their value (e.g. they cannot be transferred or do not carry the right to vote).
HMRC Shares and Assets Valuation (SAV) – an HM Revenue & Customs team that agrees share values for tax purposes.
Save as You Earn (SAYE) share scheme – an approved share scheme under which employees can save cash of up to £500 per month (before tax) for 3 or 5 years. At the end of the period, the employee can decide whether to acquire shares at a discounted price or take the cash plus interest and a bonus.
Small Companies Enterprise Centre (SCEC) – the HMRC office which deals with the registration of EMI schemes.
Share Incentive Plan (SIP) – an approved share scheme under which employee can acquire or be gifted shares. The scheme must be open to all employees.
Share option – the right to acquire shares in future at an agreed price, possibly subject to certain criteria.
Unapproved share option – a share option not granted under an HMRC approved share scheme.
Vest – the time at which a share option can be exercised.
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