What is an EMI Scheme?
An Enterprise Management Incentive, or EMI, is a share option scheme for small to medium-sized UK businesses. The scheme is tax advantageous and allows businesses to share successes with their employees.
An EMI gives employees equity involvement in a business, enabling businesses to share their successes and reward their staff.
The scheme, which is government-backed, is highly tax efficient. Businesses can offset the cost of the scheme against their tax liability, making it very tax advantageous.
EMIs are also flexible, allowing businesses to determine the conditions in which employees receive the options, over what time frame and what happens should an employee leave.
Does my business need an EMI Option Scheme?
There are many benefits to an EMI Option Scheme, including:
- Drives performance and success – creates engaged staff who are committed to the success of the business.
- An attractive benefit to potential candidates.
- Employment retention – an incentivised reason for staff to stay
- Provides employees with a sense of ownership in the business
An EMI scheme enables businesses to attract a higher calibre of candidates. Those who may not be able to be as competitive on salary against other businesses can still attract potential employees by offering them shares. The prospect of investing in a growing company can be a significant incentive for potential employees in choosing a job, even despite salary.
Everyone who opts into the share options will have a shared interest in the growth and success of the business. All will want to help increase shareholder value so that they ultimately benefit financially through the sale of shares or by receiving dividends. This can be extremely powerful for business and means that those who have an EMI often have higher success rates.
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What is a Share option?
A share option is a right to acquire shares in a company, on terms set out in an option agreement. This agreement specifies the number of shares an employee can acquire, when they can be acquired and how much the shares cost.
Options can be agreed upon with specific requirements or objectives such as achieving performance targets, a set period of employment, or following the sale of the company.
What is the difference between EMI Share Options and Shares?
Shares give employees immediate ownership in a business. Share options are an agreement with conditions laid out, meaning only once options are exercised, do they receive shares.
Because share options can only be exercisable once agreed targets have been achieved, they can work greater as an incentive than just shares.
Employees who opt for shares in the business can often suffer a tax charge if shares are bought at less than full value or are gifted. It can also cause complications should employees purchase shares from the outset and then leave the business. Share options are often therefore a more popular choice.
Are EMI Share Options Taxed?
Share options are not taxed. Although, if a share option without special tax benefits of EMI or other approved share plans is set up, income tax and even National Insurance can be charged when the option is exercised. Capital gains tax may also be payable on value growth when shares are sold.
Who is eligible for the EMI Scheme?
To qualify for an EMI scheme, businesses must meet specific requirements.
For example, businesses must:
- Be permanently based in the UK.
- Have less than £30m worth of assets.
- Have less than 250 employees.
- Not be majority controlled or owned by another company.
- Not work in excluded industries (such as banking, farming or property development)
As well as this, employees themselves have specific requirements to be eligible for the scheme.
They must:
- Spend at least 25 hours per week or 75% of their total working time as a company employee.
- Not hold 30% or more of the company’s shares.
- Not hold options worth more than £250,000 at the time of grant.
Summary
EMIs are a great way to incentivise both existing employees and prospective ones. For SMEs who may not be able to offer very competitive salaries, they’re an ideal way to attract and retain good people.
They also drive success, incentivising individuals to work together and help the business prosper.
