You may have heard about EMI schemes before and wondered exactly what they were. EMI schemes may seem complicated at first, but in reality, Enterprise Management Incentives (EMI) Share Option Schemes are a way of giving equity in your business to employees.
EMI schemes enable owners to give anyone on staff an option to own shares in the company and are available to most businesses. These shares can have a market value of up to £250,000.
Not every business is viable for EMI schemes, as certain criteria must be met. Two of the criteria for meeting this scheme is that the company needs to have £30 million or less in gross assets and that the company needs to have fewer than 250 employees.
EMI schemes are becoming popular as a way of providing a different kind of remuneration for staff. The benefit for employees is that it gives them tax advantages, as well as giving them a nice incentive for staying on the job and working hard. In short, EMI schemes are the best structure for staff in terms of tax benefits.
What is a Share Option Scheme?
How can you actually give these options to your employees? That’s exactly what a Share Option Scheme is for. They can be used with advisors or consultants and comes with rules that explain how they operate.
One of the main details explained in the Share Option Scheme rules is explaining how the option holder can earn equity in the company.
As any company owner knows, it’s not good business practice to give someone equity and let them leave the company straight away. This is the equivalent of giving a new hire 3 years’ worth of salary.
This is one of the reasons why startups really value the concept of share options as part of a remuneration package. This is because they might have limited funds at their disposal. They can, therefore, offer a lower salary but with a share option. This way they can still retain high caliber staff without paying the full cash price in salary. Instead, the employee may accept a lower salary in exchange for the future potential gain from their shares.
In addition to monetary incentives, share options help connect staff and owners towards a common goal – the ultimate success of the company. This means that they will work better together to provide shareholder value in the long term.
What is an EMI Scheme?
Enterprise Management Incentives (EMIs) are government-backed, with tax advantages. They are a share options scheme that’s usually used by smaller companies – as stated above, they can only be used by companies with less than 250 employees. It’s a great way of sharing company success with your staff.
An EMI scheme gives company owners a different way to reward employees for hard work and for taking a risk by working at a high-risk company. There will be a price agreed ahead of time at which the employees can purchase shares. When the company succeeds, so does the company value. And therefore, so do the share prices. Then, staff can sell their shares of the company at a (hopefully high) profit. Often, there will be a timeframe put in place where they must hold shares for a certain length of time before selling them.
Companies that qualify for an EMI scheme can grant shares to their employees of up to £250,000. This is per employee. This is all done without incurring a bill from National Insurance Contribution (NIC) or income tax. An EMI scheme also lets staff buy shares in the company for less than market value. Total shares coming under the EMI scheme in any company cannot total more than £3 M. This can be another incentive for employees to stay employed with your company.
Setting Up a Scheme
To get an EMI scheme started, companies need to have their articles of association checked. They will need to draft rules for their scheme option and create an agreement between the employee/director and the company.
The company also needs a valuation, so they know how much their shares are worth. HMRC is often brought into the process to agree on the valuation.
Valuations are required when:
- EMI options are granted (unquoted shares require a tax market value to see if they come under the £250,000 limit. HMRC must be notified via notification form after the grant).
- When EMI options are exercised (when exercising the market value of the shares, if income tax bills for this. Then the value of shares needs to be agreed with by HMRC to see how much tax is owed).
What are the criteria for employees to qualify?
In order to qualify for EMI share options, employees need to:
- Be employed by the company in question, or be a subsidiary
- Work at least 75% of their working hours (if less than 25 hours per week), or at least 25 hours per week. Sick leave and parental leave are exceptions to this rule.
- Not have more than 30% of the company’s share capital (or another company in a qualifying company group)
- As well as EMI options, the employee can hold SAYE options. This is if they are HMRC approved. They can hold an option in a CSOP (Company Share Option Scheme) only if the CSOP and EMI option total comes to less than £250,000.
What are the qualifying criteria for companies?
To be able to participate in EMI schemes, companies must meet the following criteria:
- Have no more than 250 employees (or full-time equivalent)
- Not controlling another company (except subsidiaries) or being controlled by another company. It must be independent.
- If the company has subsidiaries, it needs to have control of them. It must own more than 50% of them and they need to qualify too.
- The gross company assets must amount to less than £30 M. This is without deducting any liabilities. It must be a consolidated valuation.
- The company must be prepared to trade or trading commercially. It must be hoping to make profits and can’t be more than 20% in trades like excluded activities.
What is an EMI Valuation? How can I get a discount?
You need to propose an EMI valuation to HMRC. You can do this by completing a VAL 231 form. You will need two numbers:
- Unrestricted Market Value – exactly how much the shares are really worth.
- Actual Market Value – this is what the shares are worth but discounted for restrictions.
Of course, a lower price is going to be preferred by the employee. Therefore, companies usually try to agree on the lowest value possible.
What Are the Main Benefits of EMI Options?
One of the main benefits of an EMI scheme is tax benefits. Employees involved in the scheme don’t have to pay income tax as normal on the shares’ market value. Neither do they need to pay income tax on any options given to them. If they are given share options, with EMI they only get charged 10% for capital gains tax.
This is on the risk in their share value from when they got their shares. This is known as the option’s exercise price. This occurs if the price has indeed risen since they were given the options.
When EMI options are granted to an employee, they don’t need to pay national insurance or income tax on it.
The employee gets to pay 10% in capital gains tax which is the lower entrepreneur’s relief tax rate, instead of income tax. They can use an annual CGT exemption as well.
These EMI schemes are a fantastic way of attracting some amazing staff into your high-risk business. You may be a startup or just a business that’s still getting on its feet. This can make it hard for staff to want to commit to working there or take a lower salary. EMI share options give them an added benefit as a reward for hard work.
Staff and owners are working towards a common goal – company success. Employees feel like they have a real stake in what happens to the company and are more likely to align with the company’s vision and goals.
EMI schemes have the following benefits:
- Attraction and retention of staff for a longer period.
- A vested interest in the company which makes staff work harder.
- Rewards for those who are working hard in a challenging environment.
- A more committed workforce, as employees tend to work harder when they feel appreciated and invested in the company outcomes.
- The tax benefits cannot be overlooked. The EMI scheme is better than many similar alternatives.
An EMI scheme will offset the costs with the company’s liability and tax benefits your employees get. It gives you a way of rewarding talent with tax advantages and options. Sharing ownership with employees is a very tax-efficient reward mechanism.
The Flexible Way to Offer Staff Incentives
EMI schemes are the most tax-saving way of giving employees share options. This is a fantastic way to reward your managers and high-performing staff. If there is staff you want to keep around, this is a very effective method of incentivizing them. it’s best to give options to those you want to train, promote and retain.
The scheme is beneficial for both owners and employees alike. Employees work harder, causing your company to grow. Plus, you both get some great tax advantages from the process.
Generally, these options need to be kept for a 4-year timeframe. This protects the company by giving employees some longevity, so they don’t leave right after they get shares. However, this time period can be changed and does not have to be 4 years. There are many other conditions you can add to this, as well, if there are more criteria you want to impose. An example would be meeting performance targets each of the 4 years.
In the UK, about 12,000 businesses are using an EMI scheme to give shares to their staff. EMI schemes are effective for startup companies and small to mid-sized companies hoping to expand their business.
FAQs about the EMI scheme
1. What is an EMI scheme and how does it work?
“Enterprise Management Incentive” is what EMI stands for.
It is a tax-favored share option program created to aid small and medium-sized firms in keeping and rewarding their essential personnel. Employees who participate in the EMI program are allowed to purchase shares of their employer’s business at a fixed price in the future.
Employees can profit from any future growth in the company’s worth as a result.
2. What are the benefits of an EMI scheme for employees and employers?
The option to buy stock in the firm they work for, the possibility of financial rewards from any increase in the company’s worth, and a sense of ownership and connection with the business are all advantages of an EMI program for employees.
Employers can use an EMI program to retain top personnel, motivate them, and align their interests with those of the company.
3. Who is eligible for an EMI scheme?
An employee must fulfill a number of requirements in order to be eligible for an EMI scheme, including working for a qualified firm (i.e., a UK-based business with less than 250 workers and gross assets of less than £30 million) and owning no more than 30% of the business’s shares.
4. What is the maximum value of shares that can be granted under an EMI scheme?
Currently, an employee’s share grant under an EMI program can only be up to £250,000 in value. As a result, an employee may be given options to buy up to £250,000’s worth of shares in their employer’s business at a price set at the time the options are issued.
5. Are there any tax implications associated with participating in an EMI scheme?
Taking part in an EMI program indeed has tax repercussions.
The difference between the price paid for the shares and their market value at the time of exercise may be subject to income tax and national insurance contributions. This is true when an employee exercises their option to purchase shares.
When the employee eventually sells the shares, they can qualify for a lower capital gains tax rate if they hold onto the shares for at least two years.
6. Can an employee sell their shares acquired through an EMI scheme?
Absolutely, a worker may sell the shares they obtained under an EMI plan. The difference between the price they paid for the shares and their market value at the time of exercise may be subject to income tax and national insurance contributions if they are sold within two years of exercising their options.
7. What happens to an employee’s shares if they leave the company?
In most cases, an employee who quits the company will only have a short window of time (often 90 days) to exercise any outstanding stock options they may have.
They will forfeit their ability to buy the shares if they do not exercise their options within that period.
8. Is it possible to vary the terms of an EMI scheme after it has been established?
Yes, it is possible to amend an EMI scheme’s conditions after it has been set up, but any modifications must be made in compliance with the regulations of the scheme and with the consent of all parties.
9. Are there any reporting requirements for employers who operate EMI schemes?
Absolutely, employers who run EMI programs must submit certain information.
They must regularly update workers on the status of their options and submit an annual return to HM Revenue and Customs (HMRC) with information about any options granted or exercised during the previous year.
10. Can an EMI scheme be used as a way of raising capital for a company?
No, a corporation cannot raise capital through an EMI program. Instead, it’s a strategy for rewarding and motivating top employees by providing them the chance to buy stock in the business.
The retention and motivation of a company’s finest employees, which can result in higher production and growth, can be improved through an EMI system.
Also, existing shareholders may gain and potential new investors may be drawn in if the company’s worth rises as a consequence of the efforts of employees with EMI options.
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