EMI – An introduction to Enterprise Management Incentive

It can be incredibly difficult for company owners to find the perfect candidate to fill new roles. But believe it or not, holding on to your existing employees can be even more difficult.

According to HR analysts, the UK is currently part of a global retention crisis. Around 44% of workers are currently looking to jump ship. Worse yet, hiring replacements to keep operations moving forward can be both costly and counterproductive for UK company owners.

That’s why you must do everything you can to retain your employees by creating positive incentives which motivate them to stay put — and a dynamic way to offer that motivation is by introducing an Enterprise Management Incentive (EMI).

An EMI is a tax-advantaged share option scheme that offers small and private limited companies a tax-efficient way to reward, incentivise and retain top talent.

Generally speaking, Enterprise Management Incentives are flexible, although there are several key requirements your company and its employees must meet to qualify.

This guide will explain how an EMI works, which companies qualify, and how taxes work with Enterprise Management Incentives.

How does an Enterprise Management Incentive work?

An EMI is a tax-advantaged share option that enables employees to participate in share growth without generating an income tax or National Insurance liability. Launching an EMI scheme can also mean Corporation Tax deductions for employers.

If you own a company and decide to launch an EMI scheme, you’re effectively awarding a qualifying employee option over shares in your company.

That option must specify the exact price at which shares can be purchased — as well as the date by which your employees have to exercise the option. It should also specify any other conditions the employee must meet to exercise their option (which could be performance linked).

Once the conditions of the option have been met, your employee can then buy company shares at the agreed price. Once purchased, your employee becomes a company member.

Your company is allowed to grant share options up to the value of £250,000 over a three-year period.

It’s important to note that EMI share options must be exercised within 10 years (regardless of the option period you’ve specified), and you must inform HMRC every time an employee accepts an EMI option within 92 days of being granted.

Your limited company must also deliver an annual return to HMRC listing all existing EMI options.

Who qualifies for an EMI?

If you want your company’s share options to qualify as an EMI, you’ll need to meet the following conditions:

• Your company needs to carry out a “qualifying trade”. Trades that are exempt from issuing EMIs include banking, farming, property development, the provision of legal services and ship building.
• Your company must have a UK permanent establishment.
• Your company can’t have gross assets of more than £30 million when the EMI option is granted.
• Your EMI option needs to offer shares in an independent company (which means your EMI must offer shares in a parent company if you’re operating a subsidiary).
• Your company must have less than 250 full-time employees at the time the EMI option is granted.

The shares that your company issues for EMI options may be subject to some restrictions. But generally speaking, your options can apply to any ordinary company shares that are “fully paid up”. Those shares can’t be redeemable or convertible.

That’s who qualifies from a company’s point-of-view. But there are also eligibility requirements for the employees you’d like to offer EMI options to.

To qualify, participating employees of directors must meet the following criteria:

• They must spend at least 25 hours per week or 75% of their working time contributing to your business.
• They must provide a written declaration confirming they meet this working time requirement, and your company needs to keep that declaration.
• They mustn’t already hold an EMI option in your company worth more than £250,000. Options under any Company Share Option Plan (CSOP) your company operates also count towards this limit.

If an employee or a company director has a “material interest” in your company or its subsidiaries, they’re ineligible for an EMI. As a point of reference, a “material interest” means an interest of 30% or more.

How are EMIs taxed?

Enterprise Management Incentives offer a range of tax advantages to both companies and employees.

The key benefit for employees is that they don’t have to pay income tax or National Insurance Contributions (NICs) upon being granted an option. Employees don’t normally have to pay income tax or NICs when they exercise an EMI option, either — unless the exercise price is lower than the market value of the shares being granted.

That being said, employees will be required to pay capital gains tax if they decide to sell their EMI option shares.

If EMI shares are sold more than 24 months after your company has granted an EMI option, a business asset disposal relief of 10% may be available on any shares acquired as part of an EMI option.

Finally, income tax and NICs are payable on the increase in value of shares exercised more than 90 days after a “disqualifying event”. A disqualifying event could be if your company stops carrying out a qualifying trade, if your option holder moves to another company, your company is taken over, or material alterations are made to your company’s share capital.

As we’ve already mentioned, limited company owners can benefit from issuing EMIs, too. Corporation Tax relief can typically be claimed on any option gains — which could end up slicing away a decent piece of your company’s tax burden.

Want to learn more about UK company shares?

Although this guide has covered EMI options in depth, it’s important to note there’s a lot more to know about UK company shares — including the basics on ordinary shares, redeemable shares, growth shares, and more.

Check out the Linnear COSEC Insight Centre to make sure your business stays in the know about how company shares work. You can also get in touch to find out how our company secretarial services can drastically reduce your costs and free up your time to help you focus on running your business.