Why EMI schemes have tax advantages for employees tax efficiency.

Employees can acquire shares at a fixed price (exercise price) in the future. No tax is payable at the grant or exercise stage, provided the exercise price is equal to the share value at the date of grant. 

When shares are sold, Capital Gains Tax (CGT) applies on any increase in value from acquisition, which is generally much lower than income tax rates. 

If Business Asset Disposal Relief (BADR) is available, CGT can be as low as 10% (based on tax rate in force for 2024/25). 

Key benefits 

Helps retain and incentivise employees by aligning their interests with business growth. Can be cheaper, and more efficient than recruitment processes. 

Can be tailored to specific employees and business goals. 

Potential issues with EMI Schemes 

Valuations and timing 

The lower the share value at the grant date, the better the tax result for employees. Granting share options later, when the company value may be higher, may increase the cost/tax exposure for employees on the scheme. 

EMI schemes are most beneficial when set up/options granted, early in a company’s life, when share value may be immaterial. Funding rounds may impact valuations, so planning is critical. 

Eligibility and Limits 

• Restricted to companies with gross assets under £30m and fewer than 250 employees.
• Certain industries (e.g., accountancy) are excluded. 
• Each employee is limited to options worth £250k. 

Common Alternative Schemes 

Unapproved Share Option Schemes 

May be used for contractors/freelancers, part-time workers, or overseas employees. Not tax advantaged, but more flexible. 

Company Share Option Plans (CSOPs) 

Available for larger companies, but individual limits are lower (£30k per employee).

Growth Shares 

A separate share class with rights tied to specific events (e.g., sale). Typically excludes voting/dividend rights but rewards value creation.