What’s an EMI scheme?
There are over 15,000 companies in the UK using EMI options and it’s easy to see why.
An Enterprise Management Incentive (EMI) is a tax-efficient way for small and medium sized businesses to offer share options to their employees. Often used by start-up businesses who are in their infancy, it’s a great way to enable them to attract and retain top talent, at a time when they can’t offer competitive salaries. EMIs are particularly common in tech or high-growth industries, where businesses choose to align employees’ remuneration with the long-term growth plans of the business.
EMI schemes are simple to set-up and manage and are also a great way to enhance employee buy-in to the long-term growth plans of the business.
Who’s eligible for an EMI scheme?
Small and medium sized businesses who:
- Have assets of £30m or less
- Have less than 250 employees
- Are based in the UK
Companies who are eligible can offer up to £250,000 of EMI options per employee within a 3-year period.
How does it affect tax payments?
When shares are gifted to employees, they are taxed as if they are a normal part of the employee’s earnings, from both an income tax and national insurance perspective. By contrast, shares that are granted under EMI are not chargeable for either of these.
This applies when the option of shares is granted as well as when the share options are exercised. It’s on the premise that shares are bought at the fair market value price at the time the option is granted.
When do EMI options become shares?
EMI options are exactly that; ‘options’ to buy shares at a future date. If, at the point of exercise, the market value of the shares is greater than the option price (the price the employee can buy the shares at), they are known as being “in the money”. In this case, the option to buy the shares would usually be exercised, and of course vice-versa.
To put this into context, if the market value of a share is £10 and an employee has the option to buy it for £4, this is classed as “in the money”. In this case the employee is highly likely to buy the shares.
The option to buy shares usually comes up after one of the following events (known as vesting conditions):
- A specific length of time has passed e.g. 2 years after the option is granted
- The business has reached a certain revenue or profit threshold
- The company is being sold
The vesting conditions are carefully considered by the business granting the option. The agreed conditions help to keep the employee focused on a specific outcome – e.g business growth targets.
EMI options can be a great way to recruit and retain high performing employees. The employee is incentivised to drive the rapid growth the business and reap the rewards of their efforts.
For more information on EMI schemes and how to implement them, get in touch.