Advantages of an EMI option scheme

📘 Overview

An Enterprise Management Incentive (EMI) share option scheme is one of the most tax-efficient ways for growing companies to attract, motivate, and retain talented employees.

It aligns long-term staff incentives with the company’s success, particularly for rapidly expanding, technology-led businesses planning an eventual exit event (such as a stock market listing or acquisition).

This article explains the main benefits for both employees and the company, including how EMI schemes work at different stages, from grant to exercise to sale.

📊 Advantages for Employees

An EMI scheme gives employees the opportunity to share in the company’s growth while enjoying significant tax benefits.

✅ 1. No tax on grant

Employees do not pay Income Tax or National Insurance contributions (NICs) when the company first grants their share options.

✅ 2. Tax treatment on exercise

When the employee later exercises (uses) their options to buy shares:

• There is no Income Tax or NICs if they pay the same market value for the shares that was agreed with HMRC at the time of grant.
• If the exercise price is lower than that agreed market value, Income Tax becomes payable on the discount amount.
• National Insurance may also apply if the shares are considered “readily convertible assets” (that is, if they could easily be sold for cash).

💡 Tip: Most employers set the exercise price equal to the HMRC-agreed market value to avoid unexpected tax liabilities.

✅ 3. Capital gains on sale

When the employee eventually sells their shares (for example, during a buyout or IPO), they may pay Capital Gains Tax (CGT) on any profit. However, the rate and reliefs have recently changed.

This updated relief rate means the preferential tax benefit is still available but less generous than under older rules (which had a 10% CGT rate).

📊 Advantages for the Company

✅ 1. Recruiting and retaining top talent

For early-stage or scaling businesses, EMI schemes offer a cost-effective alternative to cash bonuses. They help:

• Attract skilled people in competitive sectors (especially tech)
• Retain key team members by tying rewards to long-term success
• Encourage alignment with company goals, such as a future sale or public listing

Example: You might design your EMI scheme so that options only vest upon an exit. This motivates employees to work towards the same outcome and remain with the business until it is achieved.

✅ 2. Tax deductions for the company

Companies can claim corporation tax relief when employees exercise their options and buy shares.

They can also deduct setup and administration costs of EMI schemes as allowable business expenses.

💡 Barnes & Scott insight: Many companies overlook this important relief. We help ensure the corporate tax deduction is calculated correctly so the business receives the full benefit it’s entitled to.

Key Points & Practical Summary

✅ For employees:

• No tax on grant
• Income Tax only if shares are bought below agreed market value
• Possible CGT rate at 14% (from 6 April 2025) if BADR conditions are met

✅ For companies:

• Retain and motivate staff cost-effectively
• Corporation tax relief on exercise
• Setup and management costs are deductible

💡 EMI schemes are most effective for growth-stage companies anticipating a sale or flotation, where shared ownership builds commitment and aligns incentives.