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A good way to incentivise employees in growing businesses

11 August 2017

An Enterprise Management Incentive (EMI) scheme is a share option scheme that enjoys favourable tax treatment. These are specifically targeted at small, higher-risk, growing companies.

The scheme gives participating employees the option at a future date to buy shares at a fixed price (being the value of the shares at the grant of the option). So, if the company does well and the value of the shares goes up, the employee can purchase shares at a discounted price.

As this is aimed at small, higher-risk companies it is a way to incentivise employees to invest their time and skills to help smaller businesses to achieve their potential.

There are other similar schemes available, however this is the one most commonly used and is widely regarded as being the most tax-efficient. It is worth bearing in mind that not every company can use it as certain conditions must be fulfilled.

The tax benefits of an EMI share option scheme are as follows:

Grant of options:

• No income tax or national insurance contributions

Exercise of options:

• No income tax or national insurance contributions provided the exercise price is not less than market value at the date the option was granted and the option is exercised within 10 years of grant

Sale of shares:

• Capital gains tax (CGT) is payable on the difference between the sale price and exercise price with employees being able to use their CGT annual allowance. Entrepreneurs’ relief may apply if there is a period of at least 12 months between the grant of the option and the sale of the shares.

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Sophie Martyn BSc (Hons)
Associate, solicitor
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Sophie Martyn
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