Did you know that employees received an estimated £480m in income tax and national insurance contributions (NIC) in the tax year ending 2021 from Employee Share Schemes – with EMI schemes forming the largest contributor to tax relief?
EMI share schemes (Enterprise Management Incentives) have clearly become a popular way of motivating, retaining and attracting employees in the UK, as they offer significant tax benefits for both the business and its employees.
By allowing companies to grant options (the right to shares in the company) to qualifying employees in a tax efficient way, EMI option schemes are flexible and can be tailored in a way that best suits organisational objectives and participating employees.
Is an EMI share scheme right for your business?
EMI share schemes are ideal for SMEs. If your company has assets of £30m or less, it may be eligible to offer Enterprise Management Incentives (EMIs). However, it should be noted at the outset that companies working in some sectors may not be able to operate EMIs. These include those working within banking, farming, property development, legal services and shipbuilding. To find your business is aligns with EMI qualifying, request an eligibility questionnaire.
REQUEST THE EMI SHARE SCHEME ELIGIBILITY QUESTIONNAIRE
Requirements
As EMI share schemes must be approved by HM Revenue and Customs (HMRC), there are conditions that have to be met by the employer and employee, as well as the options themselves in order to gain tax benefits:
- Eligible personnel must work 25 hours per week, or at least 75% of their overall working time, as an employee of the company.
- Employees holding more than 30% of ordinary share capital cannot be granted an EMI option.
- Businesses must be independent trading companies and not controlled by another company.
- Businesses must have fewer than 250 full-time employees at the date when the EMI options are granted.
- Companies must trade predominantly within the UK.
- Options must be exercisable within 10 years of grant.
Additionally, the market value of the option must not exceed £250,000 per employee at the date of grant. Any options that do will fall outside of the EMI regime. Most other terms are flexible and can be decided by the company in the contract.
Good for businesses, good for employees
Typically, income tax and National Insurance Contributions (NIC) are charged on the difference between the market value of shares granted to an employee and the amount paid towards them. However, in an EMI share scheme options granted at market value have no income tax or NIC at either grant or exercise of the options, as long, of course, as prior agreement of the value of the shares at grant is obtained from HMRC. Any uplift in the value of the shares when the options are exercised will be subject to the lower rates of Capital Gains Tax (CGT).
For employers
- Significantly lower tax costs.
- No employer NIC contributions on the grant or exercise of options.
- Corporation tax relief on the difference between the market value of the shares at exercise and the option price paid.
For workers
- No income tax or NIC to be paid on the grant or exercise of options.
- Lower rate of Capital Gains Tax (CGT) on any growth in the value of the shares. Most EMIs are subject to the 12 month holding period of Entrepreneurs Relief (ER), so holding can qualify for the 10% rate of CGT.
Putting an EMI share scheme to work for your business
EMI schemes are clearly beneficial for companies as they give employees a stake in the business which can aid retention and make employees feel more engaged with organisational goals. Furthermore, these schemes can also help to attract the best talent and strengthen the company’s employer brand, as part of a remuneration package.
While EMI schemes are flexible, they can be complex and careful structuring is needed to ensure the scheme is designed and implemented in a way that ensures it meets company goals. For this reason, it’s important to get the right advice and avoid potential EMI pitfalls, such as failing to get an HRMC-agreed valuation when the options are granted. That’s why it’s important to partner with a specialist such as JPP Law. Our commercial and employment law teams specialise in Enterprise Management Incentive (EMI) schemes and can make sure you get the best structure for your needs.
For a free 15-minute introductory call with one of our EMI scheme specialists, contact us on +44 (0)20 3468 3064. Our team will be happy to send you out an EMI eligibility questionnaire to assess if your business can benefit.
Related Reading
EMI Schemes – Free Initial Legal Consultation
Enterprise Management Incentive (EMI) Share Schemes: Major Changes for 2023
EMI Eligibility and the EMI Qualifying Conditions
The Unapproved Share Option Scheme
The Employee Share Scheme and EMI Scheme Rules
