The Enterprise Management Incentive ("EMI") is a well-established, tax-advantaged share option scheme that can help attract and incentivise key employees integral to safeguarding company growth.
Although originally designed for fast-growth entrepreneurial businesses, the EMI also has the capacity to provide tax-advantaged share arrangements to more established companies.
About the Enterprise Management Incentive
As a share option plan, the EMI offers selected participants the opportunity to purchase shares at a specified time and price agreed at the time the options are granted.
Individual performance and retention conditions can be built in, helping to ensure rewards are only distributed when key corporate objectives have been met.
Any full-time employee of a qualifying company may be granted tax-advantaged share options over shares with a market value of up to £250,000 at the time of the grant, subject to an overall company limit of £3 million. The shares must be in an independent trading company that has gross assets of no more than £30 million and with fewer than 250 employees.
To obtain a more comprehensive understanding of the qualifying criteria and how the scheme can have a positive impact on your business, book a free consultation with a member of our team.
Benefits of an Enterprise Management Incentive
The Enterprise Management Incentive (“EMI”) is one of the most flexible and tax advantaged share schemes currently available in the UK, offering a potential tax rate of as low as 10% on any gains.
Since EMI was introduced in 2000, the RM2 team has helped numerous companies to implement these schemes, helping to:
- motivate participants to work beyond short-term goals
- reward participants on a tax-advantaged basis (Entrepreneurs’ Relief usually available)
- protect current shareholders from immediate dilution and loss of control
- promote long-term retention of key employees
- encourage growth by linking awards to performance conditions
- provide a framework to include new participants, if required
- attract top candidates to companies
- minimise risk for participants
For more detailed information on the benefits and limitations of an EMI please download our fact sheet or call 0208 949 5522 to speak with one of our team.
EMI vs Non-tax advantaged share options
EMI Share Schemes are one of the most tax-efficient type of share option scheme available to UK-based businesses, for both the business and its employees.
Unlike Non-tax advantaged share option arrangements, income tax and national insurance contributions (“NICS”) are not normally payable when EMI options are exercised. Furthermore, when EMI shares are sold, entrepreneurs’ relief will usually apply, resulting in a capital gains tax (“CGT”) charge at the lowest rate of 10%.
The table below demonstrates the main tax advantages of implementing an EMI versus a non-tax advantaged share option scheme:
|EMI Share Option||Non-tax advantaged share option|
|Income tax and NICs on grant of option||None payable||None payable|
|Income tax and NICs on exercise of option||None payable (unless option price is discounted at grant)||Payable on share value at date of exercise|
|Capital Gains Tax on disposal of shares||Potential 10% Entrepreneurs’ Relief available||Payable at normal rate|
|Corporation tax on exercise||Deduction available on the difference between shares’ market value and the amount the employee paid||Deduction available on the difference between shares’ market value and the amount the employee paid|
Non-tax advantaged share options: tax impact
The potential impact of choosing an EMI over a non-tax advantaged share option scheme is clearly apparent in the following example:
An employee is granted options over 10,000 shares. At date of grant the shares are valued at
£1.00 per share, and the exercise price is also set at £1.00 per share.
Five years later, the share value has increased to £10.00 per share, and the company is sold. The employee pays £10,000 to exercise the option, and sells her shares immediately for £1m.
Under the EMI, there is no income tax or NICs to pay on exercise and the total gain of £900,000 on the sale of the shares is subject to CGT at a rate of 10%. The employee may also take advantage of the annual CGT exemption (2019/20 the exemption is £12,000). The employee’s net gains are approximately £800,000.
Under the non-tax advantaged share option scheme, there is an income tax and NICs charge on the value of the shares at the date of exercise (less exercise price) – ie on £900,000. (The rate can vary depending on the employee’s tax rate, and taking into account employers’ NICs, but for these purposes we’ve assumed the total tax charge is 47%). Thus on exercise the employee will pay a total of £100,000 to exercise plus Income Tax and NICs of around £423,000. Because the shares are sold immediately, CGT does not apply. The employee’s net gains are approximately £523,000.
Who is eligible to join an EMI Scheme?
To join an EMI scheme, the employees must:
- Be an employee of your company or a subsidiary of your company.
- Work for you for at least 25 hours a week or 75% of their working time (therefore, a part-time employee can qualify so long as they don’t spend more than 25% of their time working elsewhere).
- Not hold any more than 30% of the company
How we can help
At RM2 we believe in taking a consultative approach to building share plans and finding out precisely what our clients are looking to achieve. This approach helps us to deliver a professional and effective service, helping clients meet their goals and plan for the future.
How does a company set up an EMI Scheme?
Our highly experienced team are well positioned to guide your company through every stage of the share scheme process, including:
The design will flow from your objectives, so the more precise you are the better. What is your business plan, and what you need from your employees to execute this plan successfully? Do you want to focus people on an exit? Do you want to reward all employees as a team? Do you have just one key recruit in mind? We will ask you lots of questions to tease out your objectives.
At this stage, you will need to decide on any rights and conditions to attach to shares, such as performance conditions and leaver provisions. Don’t worry: we’ll recommend features for you. A key decision is the amount of equity you want to set aside for share schemes. We’ll help you with an indicative valuation and some equity modelling.
Once the design and modelling are complete, we will work through your company structure and identify what changes need to be approved by shareholders. We will then prepare resolutions to be passed and work with you to obtain approval from shareholders.
The core of a share scheme is the set of rights and restrictions attaching to shares, and these are set out in the articles of association. We will prepare amendments so that these rights and restrictions strike the right balance between delivering value to employees and protecting the interests of other shareholders.
The share valuation can have an enormous impact on how employees are motivated and the tax treatment of the shares. We will prepare a valuation and agree this with HMRC. Just as importantly, we can help you understand the meaning and implications of that valuation, and how you should adapt your strategy according to the result.
Communicating information about your share scheme to all the participants is vital its success. As standard, we will provide all clients with easy-to-follow notes explaining your scheme. We can provide further help and guidance on how to effectively promote your scheme if you wish.
Once your scheme is implemented it will need to be administered to ensure it remains compliant. We have the most experienced Operations team for share schemes in the UK, so you can be confident that your scheme is in capable hands.
We try to be as proactive as possible when it comes to monitoring your scheme’s performance. We can help improve any equity-based arrangements. You and we are always learning.
Once an employee share scheme is setup, it is vital that it is administered effectively to ensure that:
- your share plans remain compliant
- all relevant documents are filed online with HMRC
- the intended tax benefits are achieved
- employees are kept aware of their awards and the benefits
- your share plans remain relevant
If you would like to find out more about how an Enterprise Management Incentive can help your business, call a member of our team directly on 0208 949 5522, download our EMI fact sheet or send an email to email@example.com.
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