Are UK EMI Grants Right for Your Equity Program?

Enterprise Management Incentives (EMIs) are a powerful, tax-advantaged stock option scheme designed to help UK-based small and medium-sized enterprises (SMEs) attract, retain, and reward key talent. EMI schemes allow companies to grant share options to employees—giving them a stake in the business—without triggering immediate tax liabilities.

Introduced by the UK government to encourage entrepreneurial growth, EMIs are especially popular among startups, tech companies, and other high-growth businesses looking to align employee interests with long-term company success.

How EMI Schemes Work

EMI schemes function by granting employees the right to buy company shares at a predetermined price (usually the actual market value at the date of grant) at a future date. Here’s how it works in practice:

• Granting: Options are formally granted to eligible employees with clearly defined terms.
• Vesting: Employees must often meet time-based or predefined performance-based milestones before the options vest.
• Exercising: Once vested, employees can buy the shares at the original price, even if the company’s value has grown significantly.
• Selling: Tax is only due when the shares are sold, not when they're exercised — if structured correctly.

Key Benefits of EMI Schemes

For Employers:

• Cost-effective talent retention: Options incentivize loyalty without large cash outflows.
• Tax-efficient compensation: No employer National Insurance Contributions (NIC) if shares are granted at actual market value.
• Cap table control: You set the option pool, vesting schedules, and exercise terms.

 For Employees:

• Ownership without upfront cost: No tax on grant or exercise if the price is actual market value at grant.
• Capital gains treatment: When sold, shares are taxed at 10% or 20% (vs. income tax up to 47%).
• Alignment with company success: EMI options let employees benefit from company growth.

Note 👀 EMI schemes are exclusively for UK-based employees who are on PAYE (pay as you earn) payroll. To qualify for EMI tax benefits, individuals must be direct employees of the company. EOR workers and independent contractors are excluded, as they are not considered employees under HMRC rules.

EMI Scheme Eligibility Requirements

For Companies

To qualify, a company must:

• Have fewer than 250 full-time employees
• Hold gross assets under £30 million
• Be a trading company (not involved in excluded activities like finance, legal, or property)
• Be permanently established in the UK
• Not be under control of another company (unless a qualifying parent company)

For Employees

• To qualify, employees must:
• Work at least 25 hours per week or 75% of their working time for the company
• Not hold more than 30% of the company’s share capital
• Be on PAYE (EOR workers are excluded)

For Options

There are also some restrictions that apply to options granted under EMI schemes:

• Maximum £250,000 per individual in unexercised options
• Company-wide EMI pool capped at £3 million
• Option term must not exceed 10 years
• Exercise must occur within 90 days of employment termination
• Exercise price must be at or above market value at grant to enjoy full benefits.

EMI Scheme Tax Treatment

One of the standout advantages of EMIs is their exceptional tax efficiency:

• No tax at grant
• No tax at exercise (if granted at actual market value)
• Capital gains tax on sale only (10% or 20%, with annual exemption of £3,000)
• No NIC for either party if structured properly

This makes EMI schemes vastly more attractive than non-qualified options or cash bonuses — especially in high-growth environments where equity value can multiply rapidly.

How to Set Up an EMI Scheme: A Step-by-Step Overview

1. Confirm eligibility (company, employee, and option criteria)
2. Get a share valuation assurance from HMRC (to lock in favorable tax treatment)
3. Draft legal documents (option plan, option agreements)
4. Notify HMRC by July 6th the year following the date the option was granted
5. Communicate with employees so they understand the value and mechanics

EMI vs. CSOP vs. Non-Qualified Options

Common Pitfalls and Misconceptions

• “EMIs are only for tech startups” → False. They’re ideal for any high-growth SME.
• “Receiving EMI options means I own shares” → No, not until exercised.
• “All employees qualify” → Only if they meet strict HMRC eligibility rules.

Final Thoughts: Why EMI Schemes Are a Strategic Imperative

For UK startups and SMEs, EMI schemes are more than just a tax-efficient perk — they’re a strategic retention and motivation tool. Properly structured, they align employee incentives with company success, offer a competitive advantage in hiring, and preserve your company’s cash.

But navigating EMI schemes manually? That’s where things can get messy — and risky.

FAQs

What is an EMI scheme in the UK?
 A tax-advantaged share option plan for employees in qualifying SMEs.

How are EMI options taxed?
 No tax at grant or exercise (if conditions are met); capital gains tax applies on sale.

Can contractors receive EMI options?
 No — only direct employees who meet time-based criteria.

Are EMI options only for tech startups?
 No — any qualifying SME can use them, across industries.

Learn More

Learn more about equity plans in the UK with our guide to stock plans in the UK.