30 Sep EMI Scheme: All about share options
The Enterprise Management Scheme (EMI) is a share option scheme which allows smaller companies to pay employees with equity and shares in the business. This can work really well for small companies expecting significant growth, who might struggle to pay staff competitive salaries.
For example, you are a small fast growing company and you want to hire a key manager. They want £100K a year, but you can only afford £50K. You could put a package together of £50K now plus 10% share options in the company, which become valuable when the company grows in value. If the company value grows from £100K to £2M, the key manager will benefit by £190K.
What does EMI stand for?
EMI stands for Enterprise Management Incentives. This is a scheme which allows businesses to give their employees share options as an incentive.
What are EMI share options?
A share option gives employees the right to buy shares in the future at a price that is fixed today. If the value of the company increases over time, this gives the employee the opportunity to buy these shares for a low price, and sell them for a much higher price to make a significant profit.
These options can enable the company to retain key staff in early stages, even though they might not be able to pay them a competitive salary. The prospect of potential future gains can work as an excellent incentive both to gain employees, but also to increase their performance.
EMI share options vs shares
The significant difference between share options and shares is that if you own
shares, you own part of the company immediately as a shareholder, whereas if you have share options, you own the rights to buy shares in the future.
As an example, Jenny can be given 100 share options which after a 3-year period allows her to convert these into shares, which will then make her a shareholder with rights to dividends. She will not have these rights while she still has the share options, and after the 3 year period she can choose not to buy the shares.
Which businesses can qualify for EMIs?
Limited companies who fulfill the following criteria could be able to offer EMIs:
– Have assets worth £30 million or less.
– Must be a trading company.
– Have less than 250 employees.
– Is not controlled or majority owned by another company.
– Is not part of the excluded industries. See below for a full list.
– Must be permanently established in the UK.
Which employees can qualify for EMIs?
If the business is able to offer EMIs, there are also requirements for each individual employee. The employee:
– Must spend at least 75% (25 hours) of their total working time as a company employee.
– May not hold more than 30% of the company shares.
– May not hold options worth more than £250,000.
Why use the EMI scheme?
The main reason to use the EMI scheme is that it will allow you to attract and retain quality employees, even though you might not be able to pay them their expected salary. As employees with share options can directly benefit from business growth, they will most likely be aligned with your interests, and motivated to work towards a profitable exit.
The cost of setting up EMI is also deductible as a company expense.
Who are unable to offer EMIs?
Certain activities are excluded from the scheme, and companies that work in these activities cannot offer EMIs. There activities include:
– Property development
– Provision of legal or accountancy services
– Operating Hotels
– Provision of Care homes
– Ship building
– Production of Steel or Coal
Designing your company’s EMI scheme
You can design your company’s scheme however you want to. You might wish to set up certain rules to define who can get share options, what their price is, as well as certain requirements.
For example, you could decide that share options are only available to employees that have been with the company for a certain amount of time, or that employees who leave the company automatically lose their options. You can also choose to allow leavers to exercise their options under certain conditions, such as if they leave due to illness or disability, but not if they leave to join another company.
You also have to decide how much the employee will have to pay to exercise their options. This is calculated based on the current value of the shares.
We highly recommend working with a professional to design a scheme that suits your needs. Feel free to book a call to discuss this further with us.
Tax impact of EMI shares
The main benefit of the EMI scheme is that the employee does not pay any income tax on any profits made after selling the shares. There is also no payable income tax or national insurance when the options are granted.
Instead, if the employee makes a significant profit, they pay capital gains tax. At the time of writing, capital gains tax is 20%, though Entrepreneurs’ relief could reduce that to 10%, while PAYE can be up to 45%.
Alan Davidson is a Chartered Accountant, director and founder of Pentins Business Advisers, entrepreneur and author of the Amazon best-seller “Achieve Your Business Vision”. With over 25 years of helping businesses succeed, Alan knows how to build a business with real value, while avoiding costly mistakes.