Retain your best staff without increasing wages – The benefits of EMI Share Schemes

The UK is experiencing a skill shortage, with demand for certain professions increasing. Employers are increasingly finding it hard to attract and retain the most talented people, which is why they need to think about how they remunerate their workforce.

An important aspect of maintaining an effective team is recognising and rewarding talented employees but constraints on cash flow and additional tax and National Insurance costs may make a pay rise difficult.

That is why many businesses are offering alternative benefits to their staff that do not have an immediate impact on their employment costs.

Share schemes, in particular the tax-efficient Enterprise Management Incentive (EMI) scheme, could be a great way for companies to reward staff without generating an immediate monthly expense.

The EMI scheme is a Government-approved, tax-advantageous share option scheme that is predominantly used by small to mid-sized UK businesses looking to share the financial success of the company with their team.

What are the advantages of an employee EMI share scheme?

When a company establishes an EMI scheme, it selects employees and gives them the option of acquiring shares over a prescribed period, subject to qualifying conditions being met.

This brings with it the following tax benefits:

  • There is no Income Tax or National Insurance charge on the exercise of an EMI option for an individual as long as it was initially granted at market value.
  • Where the shares increase in value between the time of grant and when the options are exercised, the uplift is not charged to Income Tax or National Insurance.
  • There will be a Capital Gains Tax (CGT) charge when the employee disposes of their shares if the sale price exceeds the value per share at the time of granting the options – CGT is at a lower rate than Income Tax.

An employee may qualify for Business Asset Disposal Relief on up to £1 million of Capital Gains and pay Capital Gains Tax at a fixed rate of 10 per cent if the following conditions are met:

  • The option was granted at least two years before disposal of shares;
  • The company was a trading company or holding company of a trading group for the two years immediately before disposal;
  • The employee is still working for the company when the shares are sold.

There is no requirement for the employee to hold five per cent of the share capital of the company for Business Asset Disposal Relief purposes, providing the option is exercised within 10 days of the cessation of employment.

However, all of these tax advantages may be lost if the company:

  • Fails to establish its EMI scheme within the terms of the legislation;
  • Does not notify HM Revenue & Customs (HMRC) within 92 days of the grant of an EMI option, or
  • A disqualifying event occurs and option holders fail to exercise their share options within 90 days.

Who can utilise this tax-efficient scheme? 

A business can utilise an EMI scheme if it meets various conditions including the following:

  • 249 or fewer employees.
  • Gross Assets of less than £30 million.
  • Not majority-owned or controlled by another company.
  • Having a UK permanent establishment.
  • Be a qualifying trading company or holding company of a trading group.
  • Have qualifying subsidiaries if it is a holding company.
  • Not in an excluded industry (banking, farming, property development, provision of legal services, shipbuilding, or leasing.)
  • There is also a £3 million limit to the total value of share options held by all employees.

Employees must also meet certain eligibility criteria to obtain shares, which include:

  • Working at least 25 hours per week or 75 per cent of total working time as an employee of the company.
  • Must not hold more than 30 per cent of the company’s shares.
  • Cannot hold share options worth more than £250,000 at the time of grant.

Interested in creating an EMI share scheme?

If you are looking at innovative ways to remunerate your team and you would like to know more about share schemes or other benefits, please speak to our payroll team today.