Enterprise Management Incentive Scheme – All you need to know

Find out more about tax efficient staff retention using an Enterprise Management Incentive (EMI) Scheme.

The first steps

The EMI (Enterprise Management Incentive) Scheme is an ideal way to incentivise present and future key staff without paying premium salaries.

The EMI is a share scheme designed to assist ambitious small and medium companies reward its staff with a tax advantaged share option. This is a HMRC approved scheme which provides a number of benefits for the company and the employees, including: –

  • The employee is motivated to grow your business;
  • No additional salary costs to the company;
  • Potentially no income tax or NIC with a 10% tax rate on “gains” accrued from the date the option is granted;
  • Flexibility to choose which employees are rewarded and to what extent; and
  • The company can secure a tax deduction on the exercise of the share options for the difference between the market value of the shares at the date of exercise and the market value of the shares at the date the option is granted.

 By implementing an EMI Scheme, the employee is likely to be able to qualify for the 10% tax rate on a sale of the shares (by way of Entrepreneurs’ Relief) despite not holding at least 5% of the shares in the business. In addition, the 24-month qualifying ownership period for the 10% tax rate under the Entrepreneurs’ Relief runs from the date the options are granted (and not the date of exercise).

Therefore, it is now possible to qualify for the Entrepreneurs’ Relief 10% tax rate on a sale of shares by granting share options under the EMI scheme over less than a 5% holding at least 24 months before a sale of the shares, with those share options being exercised just before the sale. 

Who qualifies? 

Generally, the following companies will qualify:

  • Gross assets of less than £30m
  • Less than 250 employees
  • Not under the control of another company

Certain industry sectors do not qualify, including financial services and property development.

How is the EMI Scheme structured?

 Companies can structure share options in many ways, for example, so the share options are only exercised when the business is sold. In addition, options will usually lapse on the termination of employment.

Will I lose control of my business by offering options?

 No. You can determine the terms of the EMI scheme so that you retain full control. For example, the options need not give employees any voting or dividend rights. As noted above, the scheme could also be set up so that share options are only exercised when the business is sold, or when other criteria are met.

How can we help?

If you would like to discuss the advantages of the EMI share option scheme and how it can benefit your business and employees, please contact Paul Twydell. Paul is a Corporate Tax Partner who specialises in advising on employee share scheme matters.

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