Enterprise management incentive (EMI) schemes are one of the most popular ways for companies to distribute equity to employees in the UK. EMI is specifically designed for UK-based startups that are still in the early stages of their development, but which have big ambitions.
In this guide, find out how EMI options work, who can use them, and the benefits and drawbacks of EMIs compared to other employee share schemes.
The Enterprise Management Incentive (EMI) is a type of government-approved, tax-advantaged employee share scheme for companies with a permanent UK base. EMI options are the share options granted by companies under the scheme.
EMI schemes are approved by HMRC, the UK government tax authority. The approval process validates the company's valuation as fair, and establishes the strike price that employees will pay to turn their share options into shares.
When companies set up EMI schemes, employees benefit from a lower tax bill when they sell shares. Instead of being treated as income tax, employees' profits are taxed as capital gains, making the overall tax burden considerably lower.
As one of the most well-established employee equity strategies for UK startups, EMI schemes have a number of advantages for companies and for employees. Employees benefit from capital gains tax relief and there are corporation tax relief opportunities for employers too.
EMI schemes are best suited to early stage startups that expect to grow exponentially within the next 10 years. To do that, these companies need to attract talented staff, but they’re unlikely to be able to compete with established competitors on salary and benefits. An EMI scheme, with its potential for a significant payout at a low tax rate, can improve the startup’s offering to future hires.
Equity is too often thought of as a ‘nice-to-have’ perk. EMI options can transform equity into a talent-drawing tool.
One of the main reasons companies give employees equity is to encourage them to focus on the long-term trajectory, not just their next paycheck. Equity has been shown to aid retention and motivation: in Ledgy's 2022 State of Equity report, we learned that employees who don't have share options would be more motivated if their company granted them an equity stake.
Not all companies – and not all employees – qualify for EMI schemes.
To be eligible for an enterprise management incentive scheme, qualifying companies must:
Have a UK permanent establishment. To establish this, your company must meet at least one of two requirements:
The employment-related securities filing deadline for UK companies is 6th July. Companies must submit an ERS report whether or not there have been new transactions in your equity schemes. Get started on gov.uk.
To be eligible for EMI options, each qualifying employee must:
Under EMI scheme rules, companies don’t grant shares immediately. Instead, employees are granted the option to buy shares at some point in the future, at a fixed price.
This price — known as the strike price — is based on the shares’ value at the date of grant. Companies usually base the price on the actual market value (AMV) of the shares, meaning how much the shares are worth minus certain restrictions. The AMV is slightly lower than the unrestricted market value (UMV), which, as the name implies, ignores those restrictions. It’s important that you use the lower price, as it can increase the return your employees make later.
Companies setting up an EMI scheme must submit a valuation assessment that is mutually agreed by the company together with HM Revenue & Customs (HMRC). At that point, you have 120 days to grant the options.
The company establishes when employees will be able to exercise their options – i.e., buy their shares at the strike price – by creating exercise windows, which usually arrive at a liquidity event such as a public listing or potentially an acquisition. Under EMI schemes, employees normally have 10 years from the grant of the option to exercise their options to buy their shares.
Unlike share schemes that haven’t been approved by HMRC, your employee will be able to keep most of that value, without losing a significant chunk to taxes. Your company also gets to claim a tax deduction on the difference between the price the shares were granted at, and their exercise price.
Some share schemes are approved by HMRC, and others aren’t. Founders looking to maximize flexibility can give shares to their employees independently of HMRC. Unapproved schemes have no restrictions on asset worth, company size, contract type or strike price, for example. You also don’t need to have company valuations approved by HMRC.
However, your employees will not receive any of the tax benefits associated with EMI or other approved schemes. They will have to pay tax on the difference between the strike price and the price at exercise, in addition to CGT at the full 20% when they sell the shares.
HMRC backs four types of employee share schemes, including EMI. Employees who are granted shares through these schemes can all benefit from reduced taxes, but some schemes may be more appropriate for different companies.
In addition to EMI, other HMRC-approved employee share schemes include:
All of these schemes enable employees to acquire shares and hopefully reap financial benefits, without paying income tax and National Insurance. However, EMIs have the potential to deliver significantly larger returns, because there’s a higher cap on the available shares.
Under an EMI, the market value of the shares each employee can be granted is £250,000 over three years, compared to £30,000 a year under a CSOP, £500 a month under a SAYE, or £3,600 per tax year under a SIP.
There are also methods of setting up and scaling an employee equity scheme that don't need approval from HMRC. Many companies use growth shares to distribute equity to the team without having to jump through the regulatory hoops required to set up EMIs. Here are a few key differences between enterprise management incentives and growth shares.
To set up an EMI plan, companies only need a "permanent establishment" in the UK. To qualify for a growth share scheme, on the other hand, companies need a UK legal entity.
While EMI share options are restricted to employees only, it's possible to grant growth shares to advisors and consultants as well as full-time team members.
Because EMI share options are limited to companies with under £30 million in assets and fewer than 250 employees, EMI is usually best suited for companies at an early stage of development. Growth shares don't have these limits, so can be used by more mature businesses.
There is no tax due when employees exercise their EMI options. In some circumstances, though, employees may need to make an upfront payment when buying growth shares.
The capital gains tax payable when growth shares are sold is 20%, but as long as EMI options are held for over two years employees will be eligible for business asset disposal relief, which further reduces their EMI tax bill down to 10%. Generally speaking, EMIs are the most tax efficient option for companies and employees.
Still unsure which option is right for your company? This graphic lays it out clearly for you:
(Download this infographic in full)
The UK government has made EMI schemes relatively easy to set up. Once your company has established a permanent UK base, and your legal and financial advisors have confirmed that your company meets the other eligibility requirements for the EMI, the next steps are:
There are several key deadlines companies deploying an EMI scheme must meet, to ensure their employees receive the tax benefits.
Ledgy makes it easier to keep track of these key dates, and to monitor the progress of the vesting period (the time between when the options are granted and when they can be exercised).
Once your EMI scheme is live, put these dates in your calendar – don’t fall foul of a technicality when your employees’ equity is concerned, as you and your employees could lose access to the benefits of the EMI scheme.
Here are three recommended best practices to make sure your EMI scheme runs smoothly.
Neither your company nor your employees can reap the full benefits of EMI share option schemes if people don’t know how the scheme works and how to make sense of share ownership. Read Ledgy's guide to explaining equity to your team to get you started here.
Although enterprise management incentives are designed to be as user-friendly as possible, there are still loopholes that can trip you up. To make sure you’re ticking all the necessary boxes for your company, consult with equity specialists in finance and law.
One of the biggest mistakes startups make when executing EMI options schemes is missing deadlines set by HMRC. This can disqualify your employees from the tax benefits they should receive under an EMI scheme. Luckily, you can handle EMI notifications and annual return reporting right in the Ledgy app:
The UK government created enterprise management incentives to help UK-based startups attract the best talent in their respective industries. Sharing equity in your company gives potential hires a reason to choose you, and engages your team on a deeper level as together you build something special.
Interested in learning more about managing equity as you grow? Learn how UK scaleup Audiomob manages an EMI scheme on Ledgy.
There are a couple of important deadlines relating to your EMI that you need to know:
Once HMRC has confirmed your company valuation and the strike price per share, you have 90 days from the date of the confirmation letter to grant the options at that price.
Once an EMI option has been granted, the company has 92 days to notify HMRC. (Ledgy pre-fills the notification form for you and reminds you to send it within the deadline.) The option must be exercised within 10 years of granting. In the instance of a disqualifying event, employees must exercise their options within 90 days to still benefit from Entrepreneurs’ Relief, which reduces Capital Gains Tax (CGT) to 10%. If the employee misses this 90-day deadline, they will have to pay income tax and possibly National Insurance on any value the shares gain between the date of the disqualifying event and the date of exercise.
Read more about Ledgy's equity plan automation functionality.
Enterprise management incentive schemes let companies attract top talent by granting ownership stakes to employees in a tax efficient way. EMIs are easy to manage using equity management software like Ledgy. Here's an example of how an EMI share option grant is represented in the Ledgy app:
The Enterprise Management Incentive (EMI) is a type of government-approved, tax-advantaged employee share scheme for companies with a permanent UK base. EMI options are the share options granted by companies under the scheme.
Alert for UK companies: your employment-related securities filing deadline is 6th July! Companies must submit an ERS report whether or not there have been new transactions in your equity schemes. Get started on gov.uk.
