Incentivising employees is an important consideration at any stage of a company's lifecycle. Early stage companies in particular find Enterprise Management Incentive or "EMI" options to be a very effective UK incentivisation tool. The generous tax treatment of EMI options makes them attractive in recruiting and retaining key talent, with the potential gain on an exit or other growth strategy counterbalancing the fact that substantial salaries may not be on offer.
What is an EMI scheme/option?
An EMI scheme is a type of incentivisation plan that allows a company to grant share options to key employees on a tax-advantaged basis. An EMI option is a right to acquire shares for a fixed price set at grant (the option exercise price), with the options being exercisable (and shares issued to the employee) when certain criteria (agreed between the employer and employee and set out in an option award letter or agreement) have been satisfied. The expectation would be that the market value of the shares issued on exercise would exceed the option exercise price and thus the employee is able to acquire the shares at a significant discount.
Key benefits
Tax-advantaged status
For employees
A key benefit for employees is that if the option exercise price is the same as or more than the market value of the shares when the EMI option was granted, then there will be no income tax or national insurance contributions (NICs) payable when the shares are issued to the employee.
Only capital gains tax (CGT) will be payable by the employee on the sale of the resulting shares (assuming the shares increase in value). The current rate of CGT (discounted from the normal rate) is 10% if the shares are sold least two years after the grant of the EMI option.
For employers
Not only is an EMI scheme tax efficient for employees, it is also a very tax efficient option for employers. Upon exercise of EMI options, in addition to potentially not paying employer NICs, a company should normally receive a corporation tax deduction when shares are acquired under the EMI option for the gain that the employee makes at that point.
Helpfully, HMRC will normally agree with companies the relevant market value of shares before any EMI options are granted so that both employees and employers know the expected tax treatment and can set what employees have to pay, and plan for any tax payments, accordingly.
Flexibility
In general, companies have considerable flexibility in how they operate their EMI schemes. Crucially, they are free to grant EMI options to any of their employees, to set the option exercise price at any level, and to fix the employment and vesting conditions for the EMI option, as they wish.
Establishing an EMI scheme
Whether companies can establish an EMI scheme and offer EMI options to their employees depends upon both the company and the relevant employee meeting key conditions set out in UK tax legislation. Our High Growth and Venture Capital team includes specialists who can provide more information and assist with the establishment of your EMI scheme.
