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A Simple Guide to Enterprise Management Incentive (EMI)

The Enterprise Management Incentive (EMI) is a tax advantaged share option scheme designed for smaller companies. This blog will explain everything you need to know.

The EMI is a share option scheme that enables companies to attract and keep key staff by rewarding them with equity participation in the business. So, your growing business can use the EMI scheme to flexibly incentivise its employees. The EMI scheme is ideal for smaller, entrepreneurial companies that might not be able to match the salaries paid elsewhere.

Continue reading below to learn everything you need to know about EMI Schemes.

What are the EMI scheme and EMI share options?

What Are EMI Scheme And EMI Share Options?

A share option is a right to acquire shares in a company, on terms set out in an option agreement. This will specify how many shares an employee may acquire, how much he or she will have to pay for the shares, and when the shares can be acquired through exercise of the option.

Option exercise may occur, for example, after a specified period of employment, or upon the achievement of performance targets, or upon the sale of the company.

Why Have EMI Schemes?

Especially for a tech startup, where cash is often tight, shares or share options can be an important part of the package in attracting high caliber employees. An employee who sees potential for realising a significant lump sum through sale of shares may well be persuaded to join a company, even if the cash salary is less than that on offer from larger companies.

Employee share ownership helps to align the interests of a company’s owners with that of employees. All are looking to increase shareholder value through growing the business, in the hope that they will eventually benefit through sale of their shares or through receiving dividends.

Should Employees Have EMI Share Options Or Shares?

There is no certain answer to this. In some cases, it will make sense for employees to have shares from the outset. However, this will generally involve employees having to pay for their shares, or suffering a tax charge if their shares are gifted or bought at less than full value.

Having share options can provide more of an incentive than having shares, if the share options are only exercisable upon achievement of targets. And many companies prefer employees not to have shares from the outset, because of complications if employees leave. So, more often than not, the preferred solution is share options rather than upfront shares.

How Are EMI Share Options Taxed?

There is no tax charge when share options are granted. However, for an “unapproved” share option, i.e. an option without the special tax benefits of EMI or other approved share plans, income tax and possibly National Insurance is charged when the option is exercised. And when the shares are sold, capital gains tax may be payable on any growth in value since option exercise.

Why have EMI schemes?

In the early days of a startup, cash is often tight. But, building and keeping a great team is important. So, how can you operate with both these facts? You guessed it, EMI schemes. Shares or share options can form an important part of any remuneration package when attracting talented employees. An employee who believes in the potential for growth of the company could realise a significant lump sum through selling shares at a future date.

So, you’ll be able to pay less as a salary but still attract high calibre staff. Employee share ownerships help to align the interests of your owners with that of employees. All are looking to increase shareholder value through growing the business, in the hope that they’ll eventually benefit themselves by selling the shares. EMI schemes can offer shares at a discount to market value, making future gains larger and more beneficial for employees.

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Should employees have EMI share options or shares?

There’s no certain answer to this. In some cases, it’ll make sense for employees to have shares from the outset. However, this’ll generally involve employees having to pay for their shares, or suffering a tax charge if their shares are gifted or bought at less than full value.

Having share options can provide more of an incentive than having shares if the share options are only exercisable upon achievement of targets.

How are EMI share options taxed?

There’s no tax charge when share options are granted. But, for an “unapproved” share option, i.e. an option without the special tax benefits of EMI or other approved share plans, income tax and possibly National Insurance is charged when the option is exercised.

When such shares are sold, capital gains tax may also be payable on any growth in value.

Who can receive EMI options?

EMI options can only be granted to a qualifying employee of a qualifying company.

EMI scheme requirements - the company:

  • Total company assets of £30 million or less

  • Offer up to a maximum of £250,000 worth of shares per employee, and a total of £3 million for the company as a whole

  • Must not be owned by another entity

  • Have fewer than 250 full-time employees

  • Share options must be exercisable within 10 years

Companies must also not participate in any ‘excluded activities’ to be eligible.

EMI scheme requirements - the individual:

  • Must work at least 25 hours per week

  • Must own less than 30% of the company

How does EMI work in practice?

Working with professional advisers, you should first establish whether you’re EMI qualifying. If you are, then you should decide how the EMI scheme plan is to work.

EMI is very flexible but key issues include:

  • Which employees should be granted options, and over how many shares.

  • When should options be exercisable? For example, should option exercise be linked to performance targets or occur only when your company is sold.

  • What type of shares should be subject to options? For example, should they be ordinary shares or a special share class designed for options.

  • Will the share price be discounted from market value?

  • What will happen if an option holding employee leaves your company?

Once these issues are decided, formal EMI option agreements should be prepared, recording and formalising all the relevant terms. Once signed by you and your employee, the options are formally granted.

Option grants must be notified to HMRC within 92 days. Also, it’s normal practice to agree the market value of shares with HMRC in advance of the options being granted. This will provide certainty as to the tax treatment of option exercises.

In summary

The EMI scheme is a proven incentive for employees. It has the ability to attract top talent to your business whilst balancing the financial priorities of individuals and companies. Businesses that do not offer EMI options may be at a competitive disadvantage when undergoing recruitment. If your company has yet to implement an option plan, maybe now is the time to consider it.

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