What are the tax advantages of EMI options?

EMI offers: no income tax or NIC on grant, no income tax or NIC on exercise (if exercise price ≥ market value at grant), and 18% BADR on disposal (up to £1 million lifetime limit). This makes EMI the most tax-efficient share option scheme. EMI (Enterprise Management Incentives) offers three main tax advantages: (1) No tax on grant — there is no income tax or NIC when EMI options are granted. The grant is a tax-free event. (2) No tax on exercise — if the exercise price is at or above the market value of the shares at the date of grant, there is no income tax or NIC when the option is exercised. The employee acquires the shares without triggering any income tax charge, regardless of how much the shares have grown. (3) BADR at 18% on disposal — when the employee sells the shares, the gain is subject to CGT at the BADR rate of 10% (up to a lifetime limit of £1 million). This compares to the standard CGT rate of 24% for higher-rate taxpayers. The combined effect of these three advantages makes EMI significantly more tax-efficient than unapproved options. For example, on a gain of £500,000: EMI tax = £50,000 (10% BADR); unapproved options tax = up to £225,000 (45% income tax on exercise + 24% CGT on disposal). The tax saving can be over £175,000. Relevant legislation: Schedule 5 ITEPA 2003 (EMI tax advantages); TCGA 1992, Section 169I (BADR for EMI shares). Example: An employee is granted EMI options over shares worth £100,000 (exercise price = £100,000). On exercise, the shares are worth £500,000. No income tax or NIC is due on exercise (exercise price = market value at grant). The employee sells the shares for £500,000. The gain is £400,000 (£500,000 - £100,000). CGT at 18% BADR = £40,000. Total tax: £40,000. With unapproved options: income tax on exercise = £180,000 (45% of £400,000). CGT on disposal = £0 (no further gain). Total tax: £180,000. EMI saving: £140,000. Common mistake: Setting the exercise price below the market value at grant. This triggers an income tax charge on exercise for the difference between the market value at grant and the exercise price. Always set the exercise price at or above the market value at grant.

How does BADR work for EMI shares?

EMI shares qualify for Business Asset Disposal Relief (BADR) at 10% on disposal, up to a lifetime limit of £1 million. The gain is subject to CGT at 10% (instead of 24%), significantly reducing the tax on disposal. Business Asset Disposal Relief (BADR) — formerly known as Entrepreneurs' Relief — reduces the rate of CGT on qualifying business disposals to 18%. EMI shares automatically qualify for BADR (without needing to meet the 5% shareholding and officer requirements that apply to other BADR claims). Key features of BADR for EMI shares: (1) Rate — 10% (instead of the standard CGT rate of 24% for higher-rate taxpayers). (2) Lifetime limit — £1 million per individual (reduced from £10 million in 2020). (3) Qualifying period — the shares must be held for at least 2 years before disposal (the EMI option holding period counts towards the 2-year requirement). (4) Claim — BADR must be claimed on the self-assessment return. (5) Automatic qualification — EMI shares automatically qualify for BADR, without needing to meet the separate 5% shareholding and officer conditions. This is a significant advantage of EMI — employees with even small option holdings can benefit from the 18% rate. The BADR rate for EMI shares is 10%, not the 14% that applies to other BADR-qualifying business assets from April 2025 (under the October 2024 Budget changes). Relevant legislation: TCGA 1992, Section 169I (BADR for EMI shares); TCGA 1992, Sections 169A-169K (general BADR conditions). Example: An employee exercises EMI options (acquiring shares for £100,000) and holds the shares for 2 years. They sell the shares for £1,100,000. The gain is £1,000,000. CGT at 18% BADR = £100,000. Without BADR (at 24%) the CGT would be £240,000. The BADR saving is £140,000. Common mistake: Not claiming BADR on the self-assessment return. BADR must be actively claimed — it is not applied automatically. Failing to claim means the full 24% CGT rate applies.

Do I pay tax when I exercise EMI options?

If the exercise price is at or above the market value of the shares at the date of grant, no income tax or NIC is due on exercise. If the exercise price is below the market value at grant, income tax is due on the difference. The tax treatment on exercise of EMI options depends on the relationship between the exercise price and the market value at grant: (1) Exercise price ≥ market value at grant — no income tax or NIC is due on exercise. This is the most common and tax-efficient structure — the employee pays the full market value (at grant) to acquire the shares, and no income tax is triggered regardless of how much the shares have grown. (2) Exercise price < market value at grant — income tax is due on the difference between the market value at grant and the exercise price. This is less common and less tax-efficient, as it triggers an income tax charge on exercise. (3) Disqualifying events — if a disqualifying event occurs (e.g., the company ceases to be a qualifying company, or the employee leaves employment within 3 months), the EMI tax advantages may be lost, and income tax may be due on exercise based on the market value at exercise. To maximise the tax advantages, always set the exercise price at or above the market value at grant, and obtain HMRC valuation agreement (SSV or Advance Assurance) to confirm the market value. Relevant legislation: Schedule 5 ITEPA 2003, Paragraph 40 (tax treatment on exercise); Paragraph 39 (disqualifying events). Example: An employee is granted EMI options with an exercise price of £100 per share, and the market value at grant is £100 per share. On exercise, the shares are worth £500 per share. No income tax or NIC is due on exercise. If the exercise price was £50 (below market value at grant of £100), income tax would be due on £50 per share (the difference). Common mistake: Setting the exercise price below the market value at grant without realising the income tax consequences. Always obtain an HMRC valuation and set the exercise price at or above the market value.

What is a disqualifying event for EMI?

A disqualifying event occurs when the EMI conditions cease to be met (e.g., the company is acquired, ceases to qualify, or the employee leaves). After a disqualifying event, the EMI tax advantages may be partially lost — income tax may be due on exercise based on the market value at exercise (not at grant). A disqualifying event occurs when the conditions for EMI qualification cease to be met. Common disqualifying events include: (1) The company ceases to be a qualifying company (e.g., gross assets exceed £30 million, or the company is acquired by a non-qualifying company). (2) The employee leaves employment (unless they leave due to injury, disability, or retirement, or are made redundant, in which case there is a 3-month grace period). (3) The employee's working hours fall below 25 hours/week or 75% of working time. (4) The employee acquires more than 30% of the share capital. (5) The company is listed on a recognised stock exchange. Effect of a disqualifying event: (a) The options remain exercisable for 90 days after the disqualifying event (or longer if the option terms provide). (b) If exercised within 90 days, the EMI tax advantages are generally preserved (no income tax on exercise if the exercise price ≥ market value at grant). (c) If exercised after 90 days, the EMI tax advantages are partially lost — income tax is due on the difference between the market value at exercise and the exercise price (capped at the market value at the disqualifying event). (d) BADR is still available if the shares are held for 2 years before disposal. Disqualifying events can significantly affect the tax treatment, and specialist advice is needed when they occur. Relevant legislation: Schedule 5 ITEPA 2003, Paragraph 39 (disqualifying events); Paragraph 40 (tax treatment after disqualifying events). Example: An employee holds EMI options. The company is acquired by a listed company, which is a disqualifying event. If the employee exercises the options within 90 days of the acquisition, the EMI tax advantages are preserved (no income tax on exercise). If they exercise after 90 days, income tax is due on the gain from the exercise price to the market value at exercise (capped at the value at the disqualifying event). Common mistake: Not exercising EMI options within 90 days of a disqualifying event. After 90 days, the tax advantages are partially lost, and income tax may be due on exercise.

How does EMI compare to unapproved options?

EMI is significantly more tax-efficient than unapproved options. On a £500,000 gain, EMI tax is £50,000 (10% BADR) compared to up to £225,000 for unapproved options (45% income tax on exercise + CGT on disposal). The saving can exceed 50%. EMI (Enterprise Management Incentives) is significantly more tax-efficient than unapproved (non-tax-advantaged) options. The comparison: (1) Grant — EMI: no tax. Unapproved: may trigger income tax if the option has unrestricted market value exceeding the exercise price. (2) Exercise — EMI: no income tax or NIC (if exercise price ≥ market value at grant). Unapproved: income tax at up to 45% and NIC on the difference between market value at exercise and exercise price. (3) Disposal — EMI: CGT at 18% BADR. Unapproved: CGT at 24% (higher rate), with no automatic BADR (unless separate conditions are met). (4) Employer NIC — EMI: no employer NIC on exercise. Unapproved: employer NIC may be due on exercise. Example comparison on a £500,000 gain: (a) EMI: exercise = £0 income tax; disposal = £50,000 CGT (10% BADR on £500,000). Total tax: £50,000. (b) Unapproved: exercise = £225,000 income tax (45% of £500,000); disposal = £0 CGT (no further gain). Total tax: £225,000. The EMI saving is £175,000 (78% less tax). Even on smaller gains, the tax saving is substantial. This is why EMI is the preferred option scheme for qualifying companies. Relevant legislation: Schedule 5 ITEPA 2003 (EMI tax advantages); ITEPA 2003, Part 7 (unapproved options tax treatment); TCGA 1992, Section 169I (BADR for EMI shares). Example: An employee has options over shares worth £100,000 (exercise price). On exercise, the shares are worth £600,000. On disposal, the shares are sold for £600,000. EMI: exercise tax = £0; disposal CGT = £50,000 (10% of £500,000 gain). Total: £50,000. Unapproved: exercise tax = £225,000 (45% of £500,000); disposal CGT = £0. Total: £225,000. EMI saving: £175,000. Common mistake: Using unapproved options when the company qualifies for EMI. EMI is significantly more tax-efficient, and failing to use EMI can result in substantially higher tax for employees.

Share Schemes › EMI

EMI Tax Advantages Explained

EMI offers significant income tax and NIC savings on exercise and 18% BADR on disposal. Understand why EMI is the most tax-efficient share option scheme in the UK.

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Enterprise Management Incentives (EMI) is the most tax-advantaged share option scheme available in the UK. The tax benefits are substantial: no income tax or NIC on grant, no income tax or NIC on exercise (if the exercise price is at or above market value at grant), and Business Asset Disposal Relief (BADR) at 10% on disposal. Understanding the full extent of these advantages is essential for companies considering EMI and employees evaluating their options.

No Tax on Grant

There is no income tax or NIC when EMI options are granted. This is a significant advantage compared to unapproved options, which may trigger income tax on grant if the option has an unrestricted market value (UMV) that exceeds the exercise price.

No Tax on Exercise

If the exercise price is at or above the market value of the shares at the date of grant, there is no income tax or NIC on exercise. This is one of the most valuable EMI advantages — the employee can exercise the option and acquire the shares without triggering an income tax charge, regardless of how much the shares have grown in value.

BADR at 10% on Disposal

When the employee sells the shares, the gain is subject to capital gains tax. EMI shares qualify for Business Asset Disposal Relief (BADR), which reduces the CGT rate to 18% (up to a lifetime limit of £1 million). This compares to the standard CGT rate of 24% (for higher-rate taxpayers). The BADR rate for EMI shares is 10%, not the 14% that applies to other BADR-qualifying business assets.

Comparison with Unapproved Options

Unapproved (non-tax-advantaged) options do not enjoy the EMI tax advantages. On exercise, the difference between the market value at exercise and the exercise price is subject to income tax (at up to 45%) and NIC. On disposal, the gain is subject to CGT at 24% (for higher-rate taxpayers), with no BADR (unless separate conditions are met). The tax savings from EMI compared to unapproved options can be substantial — often exceeding 50% of the total tax payable.

Key Points

What You Need to Know

No income tax or NIC on grant of EMI options
No income tax or NIC on exercise (if exercise price ≥ market value at grant)
BADR at 18% on disposal (up to £1 million lifetime limit)
EMI is significantly more tax-efficient than unapproved options
The total tax savings can exceed 50% compared to unapproved options

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EMI Eligibility & Qualifying Companies EMI Tax Advantages Company Share Option Plan (CSOP)Growth Shares Business Asset Disposal Relief (BADR)Share Schemes on Exit Save As You Earn (SAYE / Sharesave)Unapproved Options & RSUs Share Incentive Plan (SIP)Employee Ownership Trusts (EOTs)Share Valuation for EMI & CSOP HMRC EMI Notification & Reporting Phantom Shares & Cash-Settled Awards Share Schemes on IPO

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