EMI Share Schemes: The Complete Setup Guide for UK Companies

Enterprise Management Incentives (EMI) is the most tax-advantaged share option scheme available to UK companies. For growing businesses looking to attract, retain, and reward key employees, EMI offers 10% capital gains tax on disposal (instead of up to 24%) and no income tax or NIC on exercise.

This complete setup guide walks through every step of establishing an EMI scheme, from checking eligibility to granting options and meeting HMRC compliance requirements.

What Is EMI and Why Use It?

EMI is a tax-advantaged share option scheme designed for small and medium-sized trading companies. It allows companies to grant share options to employees (up to £3 million per employee) with significant tax advantages:

• No income tax or NIC on exercise — if the exercise price is at or above the market value at grant
• 10% Business Asset Disposal Relief (BADR) on disposal of the shares (instead of CGT at up to 24%)
• No employer NIC (unlike unapproved options)
• Corporation tax deduction for the company on the gain realized by employees

EMI vs Other Share Schemes

EMI is the most generous scheme available, but it's only for qualifying companies:

Feature	EMI	CSOP	SAYE	SIP
Per-employee limit	£3m	£60k	£500/mo	£3,600/yr
Selective	Yes	Yes	No (all-employee)	No (all-employee)
Income tax on exercise	No	No	N/A	No (5+ years)
CGT on disposal	10%	10%	10%	No (in SIP)
Company size limit	Yes	No	No	No

Step 1: Check Company Eligibility

Before setting up an EMI scheme, you must verify that your company qualifies. The eligibility requirements are strict.

Qualifying Company Conditions

1. Independent: The company must be independent — it cannot be a subsidiary of another company (unless it's part of a qualifying group)

2. Trading: The company must be a trading company (or the holding company of a trading group). It cannot be a non-trading or investment company

3. Gross assets: Gross assets must not exceed £30 million

4. Employees: The company must have fewer than 250 employees

5. UK presence: The company must have a permanent establishment in the UK

6. Not listed: The company must not be listed on a stock exchange (AIM counts as not listed for EMI purposes)

Disqualifying Activities

The company must not be engaged in certain activities, including:

• Banking, insurance, financial dealing
• Property development or investment
• Farming or market gardening
• Shipbuilding
• Coal or steel production

Qualifying Group Structures

If your company is part of a group, the EMI scheme can still work if the group meets certain conditions. The parent company must be a trading company (or the holding company of a trading group), and the gross assets and employee limits apply to the entire group.

Step 2: Determine Share Valuation

The market value of the shares at the date of grant determines the EMI individual limit (£3 million per employee) and whether the exercise price is at or above market value (which affects the tax treatment on exercise).

How HMRC Values Shares

HMRC's Shares and Assets Valuation (SAV) team values shares based on the 'open market value' — the price in an arm's length transaction. For private companies, HMRC considers:

• Company financials (revenue, profits, assets, cash)
• Comparables (valuations of similar companies)
• Discounts (minority discount, lack of marketability discount)
• Special factors (recent funding rounds, special rights attaching to shares)

Advance Assurance

For EMI, you can obtain Advance Assurance from HMRC before granting options. This is a written agreement confirming the market value, binding on HMRC for 120 days. The process:

1. Submit a valuation to HMRC with supporting evidence (financial statements, comparables, funding round details)
2. HMRC reviews and either agrees or proposes a different value
3. If agreed, HMRC issues an Advance Assurance letter
4. Grant EMI options at the agreed value within 120 days

Advance Assurance is not mandatory but is strongly recommended — it provides certainty and prevents HMRC from challenging the valuation later.

Step 3: Draft the EMI Plan Rules

The EMI scheme must have formal plan rules that meet the statutory EMI requirements. The plan rules set out:

• The terms and conditions of the EMI options
• The exercise period and conditions
• What happens on termination of employment, redundancy, retirement, or death
• What happens on a change of control (sale of the company)
• Whether the options are exercisable for shares or cash

Key Provisions

The plan rules should include:

• Exercise price: Must be at or above market value at grant (can be nil)
• Exercise period: The period during which the options can be exercised (typically after a vesting period or on specific events)
• Vesting conditions: The conditions that must be met before the options can be exercised (e.g., time-based, performance-based, or both)
• Good leaver/bad leaver provisions: What happens to the options if the employee leaves (good leavers can exercise, bad leavers lose the options)
• Change of control provisions: What happens to the options on a sale of the company (typically accelerated exercise)

Specialist legal advice is recommended for drafting the plan rules, as they must meet the statutory EMI requirements while also meeting the company's commercial objectives.

Step 4: Grant the Options

Once the plan rules are in place and the valuation is agreed, the company can grant EMI options to employees.

The Grant Process

1. Board approval: The board must approve the EMI plan and the individual grants
2. Individual option agreements: Each employee signs an individual option agreement, setting out the grant date, the number of shares, the exercise price, the market value, and the exercise period
3. Grant date: The date the option is granted (not the date of the board meeting or the date the agreement is signed)

Step 5: The 92-Day Notification

The most critical compliance requirement: the company must notify HMRC of each EMI option grant within 92 days of the grant date.

How to Notify

1. Register the scheme: Before the first grant, register the EMI scheme on HMRC's online Employment-Related Securities (ERS) service
2. Submit the notification: For each grant, submit the 92-day notification through the ERS service, including:
   • The employee's name and National Insurance number
   • The number of shares under option
   • The exercise price
   • The market value at grant
   • The grant date
   • Whether Advance Assurance was obtained

Consequences of Missing the Deadline

If the 92-day deadline is missed, the options are not qualifying EMI options. This means:

• Income tax and NIC are due on exercise (on the gain)
• BADR is not automatically available on disposal (CGT at 24% instead of 10%)
• The company may face penalties for incorrect reporting

There is no mechanism to 'fix' a late notification — once missed, the options are permanently non-qualifying. This is the most common reason for the loss of EMI tax advantages.

Step 6: Annual Reporting

The company must file an annual return for the EMI scheme by 6 July after the end of the tax year.

What to Report

The annual return reports:

• The status of the scheme (active, dormant, or closed)
• Grants made during the year
• Exercises, releases, and variations during the year
• Outstanding options at the end of the tax year

A nil return must be filed even if no grants, exercises, or variations occurred during the year. Late filing can result in penalties starting at £100.

Tax Advantages of EMI

For Employees

• No income tax on exercise: If the exercise price is at or above market value at grant, no income tax or NIC is due on exercise
• 10% BADR on disposal: The gain on disposal qualifies for 10% BADR (instead of CGT at up to 24%), provided the options were held for at least 2 years from grant
• No employer NIC: Unlike unapproved options, there is no employer NIC on exercise

For the Company

• Corporation tax deduction: The company can claim a corporation tax deduction for the gain realized by employees on exercise (based on the market value at exercise minus the exercise price)
• No employer NIC: No employer NIC is due on the grant or exercise of EMI options
• Employee retention: EMI options with vesting conditions help retain key employees

Example

An employee is granted EMI options over 100,000 shares (exercise price £1, market value at grant £1). After 3 years, the employee exercises the options (market value £10) and sells the shares:

• Exercise: No income tax or NIC (exercise price = market value at grant)
• Sale: Gain = (£10 - £1) × 100,000 = £900,000
• CGT: 10% BADR = £90,000 (instead of 24% = £216,000)
• Saving: £126,000

If the same options were unapproved:

• Exercise: Income tax on gain = (£10 - £1) × 100,000 = £900,000 at 45% = £405,000
• Sale: No further CGT (income tax already paid)
• Total tax: £405,000 vs £90,000 — a saving of £315,000 with EMI

Common Pitfalls

1. Missing the 92-day notification — the most common and most damaging mistake. Implement a system to ensure timely notification.

2. Not obtaining Advance Assurance — without it, HMRC can challenge the valuation during an enquiry, potentially disqualifying the options.

3. Breaching the qualifying company conditions — if the company ceases to be a qualifying company (e.g., gross assets exceed £30 million, or the company is acquired), a disqualifying event occurs. Employees have 90 days to exercise their options to preserve the tax advantages.

4. Not keeping adequate records — the company must maintain detailed records (plan rules, option agreements, board minutes, valuations, notifications, annual returns) for at least 6 years.

5. Setting the exercise price below market value — if the exercise price is below market value at grant, income tax and NIC are due on exercise on the difference between the market value at grant and the exercise price.

How Newshams Can Help

At Newshams Tax Advisers, we provide end-to-end EMI scheme support:

• Eligibility assessment for your company
• Share valuation and Advance Assurance application
• Plan rules drafting (in conjunction with your solicitor)
• Grant process management
• 92-day notification and annual return compliance
• Ongoing compliance monitoring

Book a consultation to discuss your EMI scheme, or contact us for an informal discussion.

Frequently Asked Questions

What is the EMI individual limit? The EMI limit is £3 million per employee (based on the market value of the shares at the date of grant). This is a lifetime limit — once an employee has been granted EMI options worth £3 million, no further EMI options can be granted to that employee.

What is the 92-day notification? The company must notify HMRC of each EMI option grant within 92 days of the grant date through the online ERS service. Missing this deadline means the options are not qualifying EMI options, and the tax advantages are lost.

Can I set the exercise price at nil? Yes. The exercise price can be nil (or any amount up to the market value at grant). If the exercise price is at or above market value, no income tax is due on exercise. If it's below market value, income tax is due on the difference.

What happens if my company is acquired? If your company is acquired, a disqualifying event may occur. Employees typically have 90 days to exercise their EMI options to preserve the tax advantages. The EMI plan rules should include an accelerated exercise provision on a change of control.

What is Business Asset Disposal Relief? BADR (formerly Entrepreneurs' Relief) reduces the CGT rate on qualifying business disposals to 10% (up to a £1 million lifetime limit). EMI shares qualify for BADR if the options were held for at least 2 years from grant.