Enterprise Management Incentives (“EMI”) are a popular way for small and medium sized businesses to offer share options to their employees in a tax efficient manner. They are popular in start-up businesses, particularly in the technology sector, who typically aren’t able to offer competitive salaries in the early years of the company’s development and as such aim to attract and retain top talent through share incentives. EMI schemes are relatively simple to set-up and administer and provide a tax efficient way to incentivise employees to help grow the business over the long term.
EMI schemes are targeted at small and medium sizes businesses who meet the following criteria
- Have assets of £30m of less;
- Have fewer than 250 employees; and
- Are based in the UK
Eligible companies are able to offer up to £250,000 of EMI options per employee in a 3 year period.
Shares that are simply gifted to employees are taxed as if they were a normal part of the employee’s earnings, attracting both income tax and national insurance. In contrast, shares options granted under EMI are not chargeable to income tax or national insurance. This is true both at the time of granting the option and also at the time of exercising the option (assuming the shares are bought for the fair market value price at the time of granting the option).
WHEN DO EMI OPTIONS ACTUALLY BECOME SHARES?
It is important to remember that EMI options are exactly that – options to buy shares at a future date. If the market value of the shares at the point of exercise is greater than the option price (i.e. the price the employee can buy the shares at), they are known as being “in the money” and the option to buy the shares would usually be exercised (and vice versa of course). For instance if the market value of a share is £10, but the employee has the option to buy the share for £4, then the option is “in the money” and the employee would usually exercise the option and buy the shares.
The option to buy the shares usually arises after one of the following events (known as vesting conditions)
- A certain length of time e.g. 2 years after the option is granted
- Once the business has reached a certain revenue or profit threshold
- On the sale of the company
The vesting conditions are carefully considered by the business granting the option and helps to ensure the employee is focussed on a specific outcome.
EMI options are a quick and easy way to help recruit and retain high performing employees. They are particularly popular with high-growth businesses who aren’t initially able to afford expensive salaries and would prefer instead to align employees’ remuneration with the long term growth plans of the business. The employee then benefits from the growth of the business, which is their “compensation” for working at a new and rapidly growing company.
There are over 15,000 companies in the UK using EMI options and it’s easy to see why!
For more information on setting up an EMI scheme, please do get in touch with us on 01926 851516 or at firstname.lastname@example.org