This Will Help You Incentivise Employees and Pay Less Tax…

  • June 23, 2017
  • March 29, 2023
  • Shaz Nawaz
  • 5 min read

In recent blogs on Entrepreneurs’ Relief, I’ve referred to EMI scheme shares, so here’s a quick overview of what these are and how they might be useful to you.

EMI stands for Enterprise Management Incentives – a snappy title that does what it says on the tin!

These are only available in trading companies with assets of £30 million or less and not more than 250 full-time employees. The company must not be a 51% subsidiary of or controlled by another company. The idea is that employees can buy shares of up to £250,000 without paying Income Tax or National Insurance on the difference between what they pay for the shares and what they’re actually worth. The employee may be liable for Capital Gains Tax if he or she sells the shares. For shares acquired before 17 March 2016, CGT is only payable on shares that were worth at least £50,000 when purchased. For shares acquired after that date the employee only pays CGT on gains over a lifetime threshold of £100,000. Entrepreneurs’ Relief is available if the taxpayer meets the relevant conditions.

Some companies are not permitted to offer EMIs, if they work in ‘excluded activities’, including: banking

  • farming, market-gardening or managing woodlands or timber production
  • property development and dealing in land
  • provision of legal or accountancy services
  • managing hotels, nursing homes or residential homes
  • ship building

EMI shares are offered as share options granted to selected employees which allow the employee to acquire the shares at a fixed price over a stated period. There’s no tax on the exercise of the option provided it was at market value at the time of the grant. Any increase in the share price since the grant of the option is not charged to Income Tax. If the option was offered at a discounted value then the amount of the discount is subject to income tax when the option is exercised.

The shares must be ordinary non-redeemable shares and the option must be exercisable within 10 years. The employee must be a genuine employee of the company or a subsidiary (including a director) and must spend 25 hours a week or 75% of their working time (if less) working for the company. The employee must not hold more than 30% of the company’s total share capital. It’s possible to place some restrictions on the option shares, for example, if the employee leaves the company.

On disposal of the EMI shares, unlike non-EMI shares, there is no minimum shareholding requirement to be entitled to ER, but the seller must have held the option for at least 12 months (irrespective of the date of exercising the option and acquiring the shares).

Why would an employer have an EMI scheme? It’s a way of incentivising employees by giving them a share in the company’s future and retaining key employees. It’s more tax-efficient for the employee than pay rises or bonuses, and also for the company – no Employers’ NI to pay and usually the company can claim a Corporation Tax deduction when the option is exercised, equal to the market value at that point less the amount paid by the employee.

Tax-advantaged status can be lost if the company does not set up its EMI within the terms of the legislation. Prior clearance can be obtained from HMRC, both on the qualifying conditions and the share valuation. It’s essential to notify HMRC within 92 days of an option being granted as otherwise EMI status will be lost. There are also a number of disqualifying events (mainly where the company or the employee cease to meet the requirements) and, if one of these events occurs, the employee only has 90 days in which to exercise his option (if he has not yet done so) as otherwise the EMI tax advantages will be lost.

Do ask your accountant about the ins and outs of EMI options if you see this as a way of incentivising key employees.

AA Accountants

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