In today’s competitive business landscape, attracting and retaining top talent is a key objective for most businesses. One effective strategy that many UK companies use to help achieve this, is to offer share option plans to employees and, in particular, the tax efficient Enterprise Management Incentive (EMI) scheme. Subject to a few exceptions, the scheme is open to companies with £30m or less in gross assets and less than 250 staff.
Designed to offer tax-efficient share options to employees, EMI schemes not only incentivise staff but also align their interests with the company’s long-term success
1. Attract and Retain Top Talent
Offering EMI share options can help to make your compensation package more attractive, especially to high-calibre candidates who are looking for more than just a salary and bonus structure. By providing a stake in the company’s future success, you can foster loyalty and reduce staff turnover, which is particularly beneficial for start-ups and SMEs competing with larger firms for skilled professionals. In some sectors, such as the technology start up space, share options will generally be an expected part of the overall remuneration package for key employees.
2. Significant Tax Advantages for Employees
Employees granted EMI options typically pay no Income Tax or National Insurance Contributions (NICs) when the options are granted or exercised, provided the exercise price is at least equal to the market value of the shares at the time of grant. Upon selling the shares, any gains are subject to Capital Gains Tax (CGT), typically a reduced rate of 18% (from April 2026), if the option was granted at least two years before the sale of the shares.
3. Tax Relief for Employers
In addition to there being no employer’s NICs on the option exercise (saving 15%), if the company is profitable, it can also benefit from a corporation tax deduction equal to the growth in value of the shares above the exercise price at the time of exercise of the option. This deduction is equivalent to a saving of up to 25% of this gain for the company.
4.Flexibility to Suit Your Business Needs
Share options generally, and EMI options in particular, offer an attractive non-cash incentive particularly in start-ups and small companies in their early stages who may not yet be profitable and lack cash to pay higher level salaries.
EMI options offer a very flexible regime in terms of when options vest and become exercisable and what happens if an employee leaves.
In particular, one of the key concerns with offering share options in private companies, is enabling the employee to release value from their option shares following exercise. Linked to this is the practical issue of avoiding a ‘dry tax charge’ i.e. a tax charge when the employee has no ability to sell their shares to meet any tax liability arising.
Fortunately, the flexible nature of an EMI scheme means that rather than just becoming exercisable after say, 3 or 4 years have passed, they can be (and often are) designed to be ’Exit Only’. This means that the option does not become exercisable until a corporate event such as a future listing, sale or perhaps a significant investment round, or, under the shortly to be introduced ‘PISCES’ occasional trading arrangement for private shares. By linking the exercise to such an event, the employee will then have an opportunity to sell some or all of their option shares and so realise value on their option.
5. Foster a Culture of Ownership
By giving employees a stake in the company, EMI schemes can assist in cultivating a sense of ownership and responsibility. This often leads to increased motivation, productivity, and alignment of employee behaviours with the company’s goals, contributing to a more engaged and committed workforce.
In particular, EMI options are flexible enough to include a wide variety of different performance targets, tailored to the company’s needs and business sector. For example, these can include profit measures such as EBITDA or an asset or share value, and can either be linked to the performance of the company as a whole or that of a particular subsidiary or business unit.
Conclusion
Implementing an EMI scheme can be a game-changer for your company, offering a win-win situation for both employers and employees. With its significant tax advantages, flexibility, and potential to enhance employee engagement, an EMI scheme is more than just an incentive – it can be a strategic tool to support your company’s growth and long term success.
However, putting an EMI scheme in place requires careful planning and the right legal support to ensure it meets HMRC requirements and works effectively for your business.
At Postlethwaite Solicitors, we regularly advise companies on designing and implementing EMI and other share schemes. In 2024, we worked on over 90 share scheme, supporting businesses of all sizes and from many sectors to put in place tailored solutions that are both effective and tax efficient.
If you’re considering an EMI scheme, or want to explore whether it’s right for your business, get in touch with us for a no-obligation conversation.
We’re here to help you get it right from the start.
Contact us for expert advice on EMI’s and other share schemes. Call Toby Locke on 02038189420 or at info@postlethwaiteco.com.