What is an EMI share option scheme?

📘 Overview

An EMI share option scheme gives selected employees the right to buy shares in the company at a set price in the future. These shares are often worth significantly more by the time employees can exercise their options, meaning the reward grows alongside the company’s success.

Unlike a conventional share option plan, EMI schemes are designed for smaller, high-growth UK companies. They’re approved by HM Revenue & Customs (HMRC), offering generous tax advantages for both the business and its staff.

✅ How EMI schemes incentivise employees

EMI options directly link personal reward to business performance. The more successful the company becomes, the more valuable the employees’ options are.

Typically:

• Options vest (become exercisable) after a set period, often three to four years
• They can also vest on specific events, such as a company sale, merger, or takeover
• This structure encourages everyone to work toward shared growth-goals

💡 Example:

If a company grants an employee 10,000 share options at £1 each, and the company’s share value grows to £5 when sold, the employee’s potential gain is £40,000, a clear and motivating incentive.

📊 Tax advantages of EMI schemes (updated)

EMI options remain one of the most tax-efficient employee incentives in the UK, though some key rates have changed.

For employees:

• No income tax or National Insurance (NI) when options are granted, assuming the scheme qualifies
• No tax when exercising options to buy the shares (if conditions are met and the exercise price is at least the market value at grant)
• On sale, capital gains tax (CGT) applies only to the increase in value since the exercise price
• If they qualify for Business Asset Disposal Relief (BADR), the CGT rate is now 14% for disposals from 6 April 2025, rising to 18% from 6 April 2026.

For the company:

• The company receives corporation tax relief equal to the difference between: the market value of the shares at exercise and the exercise price paid by the employee
• This remains a valuable tax benefit, particularly for growing firms that are cash-constrained but keen to reward staff

🔍 Conditions and compliance points

To qualify for EMI benefits, both the company and the employee must meet HMRC’s eligibility criteria.

Company requirements (summary)

• Must have gross assets below £30 million
• Fewer than 250 full-time equivalent employees at the time of grant
• Must carry out a qualifying trade (some industries, such as banking or property-development, are excluded)
• Must satisfy the “independence test” HMRC’s updated guidance (October 2024) clarifies what arrangements might cause the test to fail.

Employee requirements

• Must work at least 25 hours per week or 75% of total working time for the company
• Cannot hold more than 30% of the company’s shares

🔗 HMRC guidance on EMI share schemes

💡 Key practical points

• Plan vesting and exit conditions early, they shape the incentive value.
• Keep records of valuations and HMRC approvals (or applications) especially given updated rules around the independence test.
• Communicate clearly with employees so they understand the long-term benefit and any tax effects.
• Seek professional tax advice before granting or exercising options, rates and reliefs are changing.
• Note the £250,000 per employee and £3 million overall limit on the value of unexercised EMI options (at grant) remain relevant.

Summary

An EMI share option scheme is a flexible, tax-advantaged way to reward and retain key employees while aligning incentives with company growth.

Both sides benefit: employees enjoy potentially lower tax rates on gains, and companies receive corporation tax relief on exercised options.

However, with CGT rates rising and HMRC tightening guidance (especially around independence), companies and employees must keep up to date with the rules to ensure the scheme remains genuinely tax-advantaged.