A quick guide to Enterprise Management Incentive schemes

29th March 2023

Are you looking to grow your business and reward employees in a tax-efficient way? If so, Enterprise Management Incentive (EMI) schemes could be the answer. EMI offers smaller businesses access to company share options that would have typically only been available to larger companies; in this guide we will provide an overview of what they are, who can benefit and how they work.

Enterprise Management Incentive (EMI) schemes are tax-advantageous employee share option schemes. They are of particular relevance to smaller and fast-growing companies, who may not be able to compete with the salaries offered by their larger and more established competitors, but can offer the potential of a good return on investment down the line.

Furthermore, they enable companies to reward their employees whilst offsetting the costs against their tax bill.

Qualifying criteria

There are certain criteria that employers must meet in order to offer an EMI scheme, including:

• They must have assets of less than £30 million
• They must have fewer than 250 employees
• They must have a permanent base in the UK
• They cannot perform certain ‘excluded activities’, including farming, legal services, property development and banking.

There are also eligibility criteria that employees must meet, including:

• They must work for the business for at least 25 hours per week, or over 75% of their working hours
• They cannot own more than 30% of the company shares.

How do EMI schemes work?

Qualifying companies can grant employees share options of up to £250,000 in any three-year period. In order to take advantage of all the tax benefits, they must be sold within 10 years of being granted. No tax or National Insurance Contributions (NICs) are payable on the options (by either the employer or employee) as long as they are purchased at the market value they had at the time the option was granted, and are not exercised for at least two years.

In addition to the above, there are further tax benefits for both employers and employees. Employers receive Corporation Tax relief on the difference between the market value of the shares upon exercise of the options and the price that was originally paid.

Meanwhile, employees benefit from a reduced rate of Capital Gains Tax (10% vs the normal 20%) when they sell their shares. This is payable on the difference in the shares’ value at the time they were exercised vs when they were sold.

 

Setting up and registering an EMI scheme

There are several stages involved in setting up and registering your EMI options scheme, as follows:

1. Make sure you are eligible – check the eligibility criteria above to ensure you qualify for an EMI scheme.
2. Create your scheme – this will involve making decisions on details such as whether your scheme will be exercisable or exit-based, what your vesting schedules will look like, etc.
3. File for valuation with HMRC – as an HMRC-approved scheme, you can apply for an HMRC-backed valuation for your business.
4. Create your share pool and seek the necessary approvals – decide on the number of shares to allocate to the plan and seek approval from your board and existing shareholders.
5. Grant your options – you can now grant options to your employees and explain the benefits of your EMI scheme and how it works.
6. Register your scheme with HMRC – you must register your scheme within 92 days of granting the options to your employees.

 

We hope that you have found this article useful and now have a better understanding of the ins and outs of EMI schemes.  Here at Thompson Jenner, our specialist team are on hand to deal with any enquiries you may have.