Enterprise Management Incentives (EMI) can be a way to give your talent pool a boost by rewarding employees with the chance to acquire shares under favourable tax conditions.
The EMI scheme is a Government-approved share option scheme and has been in use since the Income Tax (Earnings and Pensions) Act 2003 was enacted, it is designed to help Small and Medium-sized Enterprises (SMEs).
However, there are still many businesses that are not fully leveraging the scheme and could be missing out on valuable financial rewards.
What are the benefits of EMIs?
The biggest appeal for the use of EMIs is their tax efficiency.
Employees can pay no Income Tax or National Insurance Contributions (NIC) on EMIs provided the exercise price is set at or above the market value of the shares at the time the options are granted.
The shares acquired under EMI options often attract Business Asset Disposal Relief (BADR) if the shares are subsequently disposed at a gain, which means that up to £1 million of gains is taxed at the lower rate (currently 14 per cent) when calculating Capital Gains Tax (CGT).
These financial incentives are also paired with a lack of employer NICs as well, so they can be a good way to reward employees without incurring additional costs.
Offering employees a chance to acquire shares helps them to feel invested in the business, as the growth and success of the business benefits them in a much deeper way.
This is especially useful in start-ups or high-growth companies where EMIs can be an effective way to supplement slightly lower salaries and keep employee costs down without making your team feel undervalued.
EMI distribution can be tied to performance targets and can serve as an effective way to reward high-value workers for their efforts.
Who qualifies for EMIs?
There are two main factors that determine the eligibility of EMIs – the criteria for a company and the criteria for an employee.
The awarding company must be independent at the time of the grant (and subsequently).
This means that it should not be controlled or majority-owned by another company, and there should be no imminent loss of independence.
As this is designed to give SMEs a boost to their potential to reward employees, the size of a business is a key factor in its eligibility to use EMIs.
A business awarding EMI options must have fewer than 250 full-time equivalent employees, be a permanent UK establishment, and be carrying on a ‘qualifying’ trade (some trades are excluded).
For employees to qualify, they need to be a direct employee of the company. This can include directors, though independent contractors, consultants, and other third parties not directly employed by the business are ineligible for EMIs.
An employee needs to work for at least 25 hours a week for the company or devote 75 per cent of their total working hours to it, in order to be eligible.
EMIs are designed as a bonus for employees, so no individual can amass the rights to more than 30 per cent of a company’s ordinary share capital and still qualify for new options.
This allows EMIs to operate as a tool for equitable reward that more employees can utilise.
An additional benefit for the issuing company is that when the options are exercised, a deduction can be claimed against profits based on the difference between the market value of the shares at the time of exercise, and the amount paid by the option holder. This can yield substantial corporation tax savings where the value of the shares has risen between the date of grant and the date of exercise.
EMIs remain one of the most tax-efficient share-option structures for SMEs to leverage.
We want to help you maximise your finances while staying fully compliant with regulation and can guide you in implementing an EMI or deciding if it’s the best option for your business.
