Enterprise Management Incentives (EMI) schemes, a type of EMI option scheme, offer significant tax advantages for both employers and employees. These share option plans help companies attract talent while giving staff the chance to own part of the business they work for.
What Are Enterprise Management Incentives (EMI)?
EMI is a tax-advantaged share option scheme designed specifically for smaller, growing companies in the UK. This arrangement allows you to grant share options to your employees under favourable tax conditions.
An EMI scheme works as a type of share option plan where employees receive the option to purchase shares at a set price after fulfilling certain conditions.
With EMI, your employees can acquire shares in your company without paying income tax or National Insurance contributions at the time they exercise their options. This benefit significantly reduces the tax burden compared to other share arrangements.
EMI options are granted based on specific eligibility criteria and specifications. Employees and directors must qualify for such options, and there are restrictions on the share value. Companies must meet certain conditions to grant EMI options to ensure compliance with regulations.
It is crucial to notify HMRC by 6 July following the tax year in which the options are granted to ensure compliance with legal and regulatory requirements.
EMI options involve ordinary shares with a set exercise price, often at market value when granted. Your employees can exercise these options after meeting specific vesting conditions that you establish.
The scheme was created to help smaller businesses compete with larger companies for top talent by offering equity incentives.
Key Features and Eligibility Criteria
To qualify for EMI, your company or group must have fewer than 250 employees and gross assets of no more than £30 million. You cannot be controlled by another company, and your business must not operate in excluded activities like property development or financial services.
Additionally, qualifying companies must engage in specific qualifying trades to be eligible for tax relief under the EMI scheme. This includes meeting detailed provisions regarding qualifying trades and ensuring compliance with the regulations.
If the qualifying criteria are not met during the life of the option, it triggers income tax on gains accrued in that non-qualifying period.
EMI options must:
- Be exercisable within 10 years
- Be over ordinary shares
- Have a properly determined market value
- Be set out in a written agreement
Your employees must work at least 25 hours weekly or 75% of their working time for your company. Each individual can hold options worth up to £250,000, with a company-wide limit of £3 million.
The primary attraction is the tax treatment: employees pay only 14% Capital Gains Tax when selling shares through Business Asset Disposal Relief, rather than the standard 24% rate.
Key Benefits of EMI Schemes
Enterprise Management Incentive (EMI) option schemes offer substantial advantages for both employers and employees due to their tax efficiency. These schemes provide the most tax efficient way to reward staff with equity, fostering company loyalty and growth while benefiting from significant tax offsets.
Additionally, EMI tax benefits can be significant for both employers and employees, provided they meet the eligibility criteria for the scheme.
Tax Advantages for Employees
EMI schemes provide employees with generous tax advantages compared to other share arrangements. When you exercise your EMI options, you won’t pay income tax on the difference between what you pay for the shares and their market value. This can save you thousands in potential tax liabilities.
Additionally, the difference between the market value of shares and the amount the employee pays when exercising EMI options can lead to corporation tax relief for businesses, underscoring the financial dynamics between employee shares and their cost.
When you eventually sell your shares, you’ll benefit from a reduced Capital Gains Tax rate of just 14% through Business Asset Disposal Relief (formerly Entrepreneurs’ Relief). This is much lower than the standard CGT rates of 18% or 24%. EMI schemes are the most tax efficient option for employees, as tax is only incurred on the value of the shares at the time they are awarded, not when exercised.
The qualifying period for this relief is typically 24 months from the date options are granted. There’s also no National Insurance contributions due when EMI options are exercised, further enhancing the tax efficiency.
Tax Efficiency for Employers
Companies benefit from valuable tax advantages when implementing EMI schemes. Your business can claim corporation tax relief on costs associated with setting up and administering the scheme.
When employees exercise their options, your company receives corporation tax relief on the difference between what employees pay for shares and their market value. This creates a tax deduction that reduces your overall tax bill. Additionally, the corporation tax deduction is based on the difference between the share’s market value at acquisition and the exercise price paid by the employee, potentially providing significant cash benefits to the company.
You’ll also save on employer’s National Insurance contributions since EMI options aren’t subject to NICs. This provides significant savings compared to cash bonuses or salary increases.
EMI schemes allow your company to reward employees without immediate cash outlay, preserving working capital for business growth and development.
Employee Share Ownership and Retention
EMI schemes create a culture of ownership that boosts employee commitment and retention. When your team owns shares, they have a direct stake in the company’s success and growth. It is crucial for option holders to meet specific conditions to maintain the tax benefits associated with their options. Monitoring option holders to ensure compliance with working time requirements is essential, as failure to do so can disqualify the option holder and result in the loss of tax benefits.
Share ownership aligns employee interests with business objectives, encouraging higher productivity and engagement. Staff are more motivated to contribute to increasing the company’s value when they stand to benefit personally. Qualifying shares can provide corporation tax relief and further enhance retention by aligning employees’ interests with the company’s goals.
You can design EMI schemes with vesting periods, typically 3-5 years, which encourages talented employees to remain with your company long-term. This reduces costly staff turnover and maintains organisational knowledge.
EMI options also serve as a powerful recruitment tool, helping you attract skilled professionals who might otherwise be drawn to larger companies offering higher salaries.
Tax Treatment and Implications
The tax advantages of EMI schemes make them highly attractive for both employers and employees. EMI options offer significant tax benefits compared to other share schemes, with advantages at each stage from grant to sale. EMI tax treatment can impact the tax obligations of employees who are granted EMI options, emphasising the importance of compliance with HMRC guidelines.
Obtaining advance assurance from HMRC regarding eligibility for EMI schemes is crucial, especially when there is uncertainty about qualifying criteria. This assurance helps ensure compliance and maximises the potential tax benefits associated with EMI options.
Understanding disqualifying events is crucial within the context of EMI options. These events can impact tax benefits for both employees and employers, and if an option is exercised shortly after a disqualifying event, full tax relief may be preserved.
Capital Gains Tax (CGT) on EMI Scheme Gains
When you sell shares acquired through an EMI scheme, you’ll be subject to Capital Gains Tax on the profit rather than income tax. The date of grant is crucial for tax calculations as it affects tax liabilities, including exemptions at the grant stage and deadlines for notification to HMRC.
This is calculated as the difference between the sale price and the exercise price you paid for the shares, considering the actual market value at the time of grant. Employees can sell their shares at a potentially higher current market value after exercising their options, which can result in significant financial gains.
The standard CGT rate for higher rate taxpayers is 24%, but EMI shares qualify for a reduced rate of just 14% if certain conditions are met. This represents substantial tax savings compared to income tax rates of up to 45%.
PAYE and National Insurance Considerations
One of the key advantages of EMI schemes is the absence of PAYE and National Insurance Contributions at the time of grant. Unlike unapproved share options, no tax is triggered when EMI option grants are awarded to you.
To qualify for EMI tax relief, it is essential for companies to have a permanent establishment in the UK. This criterion ensures that the company is eligible for the EMI share scheme.
When you exercise your EMI options, there’s typically no income tax or NICs to pay at this point either, provided the exercise price was set at or above the market value of the shares when the options were granted. Employee share schemes, such as the EMI, play a crucial role in tax efficiency by offering a flexible and tax-efficient share option plan that enables employees to have a stake in the business.
If you exercise your options at a discount (below market value at grant), you may face an income tax charge on the difference. However, this is significantly more favourable than non-qualifying schemes.
Income Tax Reliefs and Allowances
EMI schemes offer substantial income tax advantages compared to other forms of remuneration. They are considered a tax efficient option because no income tax is charged when options are granted to you.
When exercising your options, income tax is only payable if:
- The exercise price is lower than the market value at grant
- The options are exercised more than 10 years after grant
- You no longer qualify for the EMI scheme
Option holders must meet specific conditions, such as maintaining the required working time to retain tax advantages. They also need to be aware of the formalities involved in granting and exercising these options.
This tax treatment contrasts sharply with cash bonuses or unapproved share options, which would typically be subject to income tax at your marginal rate (up to 45%) plus NICs.
The tax is calculated only on the difference between what you pay for the shares and their value at grant, not their current value.
Proper legal compliance in the setup of a share scheme is crucial, including the preparation of various legal documents such as share plan rules, board resolutions, and notices related to option grants and exercises.
Business Asset Disposal Relief (BADR) Eligibility
EMI shares qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), allowing you to pay just 14% CGT on qualifying gains up to a lifetime limit of £1 million. To be a qualifying employee, you must meet specific criteria such as working a minimum number of hours per week and having a certain relationship with the company.
For a group to be eligible for these options, they must be provided over shares in the parent company.
To qualify for BADR with EMI shares, you must:
- Hold the option for at least 24 months before selling
- Be an employee of the company throughout this period
- Hold less than 30% of the company’s shares
Employees with a material interest of more than 30% of the share capital are excluded from participating in the scheme, highlighting the regulatory boundaries regarding employee ownership and options allocation.
This relief is particularly valuable as it applies even if you don’t meet the normal 5% shareholding requirement that typically applies to BADR. This makes EMI schemes especially attractive for employees with smaller shareholdings.
The 14% tax rate under BADR represents significant savings compared to the standard 24% CGT rate for higher rate taxpayers.
Make the Most of EMI Schemes With Us
At Plus Accounting, we specialise in helping businesses implement effective EMI schemes. Our team understands the complexities of Enterprise Management Incentives and can guide you through the entire process. Obtaining professional advice is crucial to ensure compliance with all requirements and to avoid potential pitfalls in the setup process.
However, it is important to consider the potential risks inherent in share option plans. If a company fails and encounters difficulties resulting in a decrease in share value, employees may not profit from their shares.
We’ll help you determine if your company qualifies for an EMI scheme. Not all businesses are eligible, and we can assess your situation to ensure compliance with HMRC requirements. Adhering to EMI scheme rules is essential to outline the necessary components and guidelines that govern your EMI share plan.
Our experts can design a customised EMI scheme that aligns with your company objectives. We’ll help you structure option agreements, set appropriate exercise prices, and establish vesting schedules that work for your business.
Our EMI scheme services include:
- Eligibility assessment
- Valuation of company shares
- Review of option agreements
- HMRC notification and approval
- Ongoing compliance support
We also provide comprehensive guidance to your employees. They’ll understand exactly how their options work and the potential financial benefits they could receive.
Contact us today to learn how we can help your company implement an EMI scheme that motivates your team and supports your long-term business goals.