What is an EMI scheme?
An EMI is a HMRC-approved, tax-efficient share scheme designed to help smaller companies recruit and retain key employees that may not have the funds to do so via salaries and bonuses. EMI schemes are a very flexible and tax-efficient way to incentivise employees through shares.
The scheme works by incentivising key employees (including directors) by granting them options, i.e. the right to acquire shares in the company in the future at a price agreed at the time the options are granted – “the exercise price”.
Due to the flexibility of EMI schemes, they can be designed in a unique way for your company and the goals you want to achieve. You can decide how and when share options can be exercised, such as only if certain turnover or profit targets are met, or a sale occurs. EMI schemes, therefore, incentivise staff to work collaboratively to hit targets so they can obtain their rewards.
What are the benefits of an EMI scheme?
There are a number of benefits for both the employer and the employee.
The benefit to employees is that there is no upfront cost. When the ultimate exercise of the share options takes place, the employee will pay the exercise price agreed at the date of grant for the shares.
As long as the exercise price paid is equal to or greater than the original market value at the date the option was granted, no Income Tax or National Insurance liabilities will arise.
This is similar for the employer, where EMI shares are exercised at or above the original value at the date of grant, and no National Insurance liabilities arise for the employer.
See a full list of the benefits in our dedicated EMI blog.
Does your company qualify?
For an option to be qualifying, an employee may not hold unexercised options in respect of shares with a total value of more than £250,000 at the time that the options are granted. See Part One of our EMI blog to see how shares are valued.
On average, the employee must work at least 25 hours per week for the company (or 75% of their working time, if less). They also must not have a ‘material interest’ in the company – broadly speaking, this means more than 30% of its share capital. This also includes any of their associates (e.g., spouse, parent, grandparent, child, grandchild or remoter relative in the direct line).
Companies must carry on a qualifying trade. The term ‘qualifying trade’ is defined as an activity undertaken with a view to the realisation of profits that does not, to a substantial extent, consist of an excluded trade.
Companies must also meet various other qualifying conditions both before and after options are granted. For details of the qualifying conditions or the non-qualifying trades, see our blog here.
Have a question?
Speak to a team member today to see if you qualify.