Enterprise management incentives: how EMI share option schemes work

EMI schemes can provide valuable incentives for employees while offering tax efficiencies for growing businesses.

What is an enterprise management incentive

An Enterprise Management Incentive (EMI) is a share option that enables employees to take equity in a company in a tax-efficient manner. It can function as a reward incentive and be offered to select employees or all employees in a business.

How an EMI scheme operates and its benefits

Once the structure has been set up, an employee can be offered a number of shares with the option to exercise these within a relevant time period, such as 10 or 15 years.

Where EMI options are granted at not less than market value, employees will generally not pay income tax or National Insurance Contributions on any increase in value between the date of grant and exercise.

Capital Gains Tax may be payable when shares are later sold. Accountancy or tax expertise is strongly recommended when considering whether to move ahead with EMI.

The company can also benefit. Up to £6 million in shares can be offered under this structure, and a corporation tax deduction is potentially available whenever an EMI scheme is exercised.

Qualifying for an EMI scheme

There are certain requirements to be met in order to qualify for this scheme:

• A company must have fewer than 500 employees.
   
• Employees must work for the company or group for at least 25 hours per week or, if less, at least 75% of their total working time.
   
• Employees must not have a material interest in the company prior to joining the EMI scheme. This broadly means more than 30% of the ordinary share capital, taking into account certain associated persons.
   
• A company must have less than £120 million in gross assets.
   
• A company must not carry on an excluded trade, such as banking or other financial activities, farming, property development, dealing in land, legal services or accountancy services.

Requirements and process

An EMI scheme can be flexibly tailored to meet a company’s needs but requires careful attention to the technicalities involved.

The process will often include amendments to the articles of association, where needed, together with preparation of the option agreement, board minutes, and resolutions.

Careful consideration should also be given to how the structure will operate in practice, including the rights attaching to shares and any performance conditions applicable to the scheme.

Legal and accountancy input is typically required to ensure the structure complies with HMRC requirements and aligns with the company’s wider commercial objectives.

Guidance from our corporate solicitors

Our corporate team regularly advises businesses on EMI schemes and wider shareholder and incentive arrangements.

Dylan Leet, corporate partner and head of real estate finance, says:

"EMIs are an increasingly popular competitive incentive for employees, but require careful attention to their technicalities. Ensuring you have a solid foundation for the scheme in place can make all the difference."

Our corporate solicitors advise businesses across a broad range of corporate and commercial matters, including shareholder arrangements, company restructuring, investment transactions, and employee incentive schemes.

Working with businesses locally and nationwide, we provide practical and commercially focused advice tailored to the needs of growing companies and management teams.

Get in touch to speak with our corporate solicitors.