EM Law EMI Option Scheme

Option Scheme (EMI) - Do I qualify for one?

Suzy Giele is one of the UK's leading experts on EMI option schemes and other forms of employee share incentive schemes.

An Enterprise Management Incentive (EMI) scheme is an approved employee share scheme whereby qualifying companies can grant share options to qualifying employees up to the value of £250,000. An EMI option scheme  may be granted under a set of plan rules, or by way of stand-alone EMI option agreement however a company cannot grant EMI options over more than £3 million worth of shares at any time. Specifically aimed at small, growing companies, an EMI option scheme can provide significant advantages to both the employee option holder and the company.

Does my company qualify for an EMI Option  Scheme?

Most but not all companies can grant EMIs. Companies that work in ‘excluded activities’ are not permitted to offer EMIs. These activities include banking, farming, property development, provision of legal services, and ship building. In addition, the company must be an independent trading company with:

  • Assets of £30 million or less; and
  • Fewer than 250 full-time employees

Do I qualify for an EMI Option Scheme?

In order to qualify for an EMI option scheme, an individual must be an employee of a qualifying company, or one of its qualifying subsidiaries. The employee must spend at least 25 hours per week, or at least 75% of their working time, as an employee of the company and must not hold more than 30% of the company shares. EMI options cannot be granted to non-executive directors or consultants.

Do all shares qualify for an EMI Option Scheme?

Not all shares qualify for EMI options. EMI options can be satisfied by newly issued shares or by the transfer of existing shares from a shareholder. The shares must also meet certain requirements. The shares must be non-redeemable, fully paid up, ordinary shares.

Why should I consider an EMI Option Scheme?

An EMI option scheme can be beneficial to both an employee and a company. As well as being a valuable tool for recruiting employees and incentivising key staff, EMI option schemes can be very tax efficient.

Usually, an employee would pay income tax on the market value of any shares or options granted to them by a company. With EMI option schemes, an employee will not have to pay income tax or national insurance if they buy the shares for at least the market value they had when they were granted the option. When the option shares are sold, any uplift in the value of the shares will be subject to the lower rates of capital gains tax (in comparison to income tax rates). Shares acquired on the exercise of EMI options also qualify for entrepreneurs’ relief so provided the conditions are met, capital gains tax will only be charged at 10%. The employee can also use their annual capital gains tax exemption.

For companies, a corporation tax deduction may be available when the EMI options are exercised. Relief is given in the accounting year in which the options are exercised and should be claimed by the option holder's employer company (not the company whose shares are acquired, if different). The deduction is equal to the gain the employee makes.

If you have any questions or would like further information on an EMI option scheme please contact Suzy Giele.


Employee Share Schemes EM Law

Employee Share Schemes: ProShare Research on Attitudes to Employee Share Ownership

ProShare interviewed 1,699 employees across the UK workforce of 11 companies. About 70% of those interviewed were participating in their company’s SAYE and/or SIP; 30% were not.

Employee Share Schemes: What is SAYE?

Save As You Earn (SAYE) was introduced in the Finance Act of 1980. Under a SAYE Plan, employees are given the right (“option”) to buy a certain number of shares in the company at a future date at a purchase price (the “option price”) that is determined when the option is granted. The option price must not be less than 80% of the market value of the underlying shares at the time of grant. Participating employees are required to save between a minimum of £5 and maximum of £500 per month under a SAYE savings contract with an approved building society or bank savings carrier. SAYE contracts last for three or five years. Any bonus or interest earned on these savings is tax free.

Employee Share Schemes: What is SIP?

The Share Incentive Plan (“SIP”) is a tax-advantaged plan that offers Income Tax and National Insurance advantages for employees and companies, provided the Plan meets the requirements of Schedule 2 of the Income Taxes (Earnings & Pensions) Act 2003 and is also registered and reported via HMRC’s ERS Online filing service

Employee Share Schemes: Age Groups

Participants were split into the following categories:

Millennials (younger aged 16 – 21 / older aged 22 – 37)

Generation X – Younger (aged 37 – 45)

Generation X – Older (aged 46 – 56)

Baby Boomers (aged 66 – 72)

Maturists (aged 73+)

Here are some of the take-outs:

Employee Share Schemes: SAYE Participants

Reasons for participating in the scheme: 80% said it was a convenient way to save, 38% said they wanted to own shares in the company, 75% said they wanted to profit from the shares and 2% cited other reasons.

Across the generations – millennials thought convenient way to save was the was important factor with this reason being less important for Generation X and even less for Baby Boomers. For Baby Boomers ownership in the company was more important than for Generation X and the least important factor for Millennials.

Reasons for non-participation in the scheme: 40% said they couldn’t afford to participate, 25% percent said they couldn’t participate for another reason, 21% said they had other arrangements, 16% said they may not be with the company long enough, 6% said they didn’t know how the scheme worked, 6% said that shares were a risky investment and 3% said they weren’t aware of the plan.

Across the generations – it was the younger Generation X group who showed the greatest loyalty to their employer with only 7% of them citing a non-participation reason of not planning to be with the company long enough to benefit from the Plan.

Employee Share Schemes: SIP Participants

Reasons for participating in the scheme: 77% said it was a convenient way to save, 52% said they wanted to own shares in the company, 69% said they wanted to profit from the shares, 67% said the matching shares were valuable to them and 58% said the tax advantages were valuable to them.

Millennials valued SIP as a means of share ownership to a greater degree than their older colleagues, with 58% being the highest value recorded across the generations for this reason for participation. However, Millennial employees value the convenience of SIP even more highly at 78%.

Reasons for non-participation in the scheme: 32% said they couldn’t afford to participate, 5% said they didn’t feel able to participate, 25% percent said they didn’t understand how the scheme worked, 18% said they had other arrangements, 24% said they may not be with the company long enough, 17% said they weren’t aware of the plan, 24% said that shares were a risky investment and 23% said they had other reasons.

47% of Millennials choose not to participate in SIP because they don’t believe they’ll be with the company long enough to benefit from the Plan. The five-year holding period is simply too long a time-horizon for them.

Employee Share Schemes: Conclusions

The survey report contains more analysis than outlined above but even from these figures one can see that educating employees on how employee share schemes work and even making them aware that they exist is something that employers should focus more on, in particular, in these examples, around the SIP schemes.

More examples of the experience with employee share schemes can be found in the link.