If you’re running a growing business and want to reward key people without putting more pressure on your cash flow, Enterprise Management Incentive (EMI) options are worth serious consideration. They allow you to give employees the right to buy shares in the future, usually at a fixed price, with generous tax treatment for both the company and the individuals involved.
This blog walks through who can use an EMI scheme, how to put one in place, how valuation works, and what to watch out for once the scheme is up and running.
What Is An EMI Scheme?
An Enterprise Management Incentive (EMI) scheme is a government-approved share option plan aimed at small and medium-sized companies. Instead of giving staff pay rises or bonuses now, you grant options over shares that can be exercised later, often when the company has grown or hit certain milestones.
Because EMI is specifically designed to support high-growth businesses, it comes with tax advantages that are usually more attractive than standard share options. Employees can benefit from gains on their shares at lower tax rates, while companies may get corporation tax deductions when options are exercised.
Why EMI Can Be A Powerful Tool For Your Business
A well-designed EMI scheme can help you:
- Compete for talent: Offering meaningful equity can make your offer stand out, even if you can’t match bigger employers on salary.
- Keep key people for longer: When employees know they could share in the success of the business, they are more likely to commit for the long term.
- Align interests: Equity makes people think like owners, not just employees, which can encourage better decision-making and performance.
- Improve tax efficiency: Both the company and the employee can benefit from favourable tax treatment if the scheme is structured correctly.
Rather than being a “nice extra”, EMI can become a core part of your reward strategy.
Who Can Use An EMI Scheme?
Before you go too far with design and documentation, it’s important to check that both the company and the participating employees meet the rules.
Company conditions
Broadly, to qualify for EMI:
- The company must have fewer than 250 full-time equivalent employees.
- Gross assets must not exceed £30 million at the time options are granted.
- The company must carry on a qualifying trade. Activities such as certain financial services, investment-related businesses, property development, and some other sectors are excluded under HMRC rules.
If you operate a group structure, you’ll also need to consider group-wide tests for employees and assets.
Employee conditions
To receive EMI options, employees generally must:
- Work for the company for at least 25 hours per week, or devote at least 75% of their working time to the business.
- Hold less than 30% of the company’s ordinary share capital (including shares owned by certain associates in some cases).
If these criteria are not met, the tax advantages of EMI may be lost, so eligibility checks are an essential early step.
A Step-By-Step Guide To Setting Up An EMI Scheme
Once you’re confident that EMI is available to your business, you can move on to putting the scheme in place. The process is structured but manageable if tackled in stages.
- Confirm eligibility
Start by reviewing the company and employee conditions against the current HMRC rules. Document your conclusions; this helps if questions arise later. If there is any doubt, professional advice at this stage can prevent problems further down the line.
- Get specialist advice
An EMI scheme touches on tax, employment law, company law, and shareholder rights. Working with advisers who understand EMI means you are more likely to end up with a compliant, practical scheme that suits your growth plans.
- Design the scheme
Next, decide what you want the scheme to achieve and translate that into clear rules. For example:
- Who will be invited to participate?
- How many options will each person receive?
- What will the exercise price be? (Often set at or above market value on grant.)
- Will options vest over time, based on performance, or at a specific event such as an exit?
This design work sets the tone of the scheme and determines how motivating it will be for your team.
- Value the shares
You then need a defensible estimate of your company’s share value. This is crucial because it affects both the tax position and the perceived fairness of the scheme. Most companies choose to:
- Prepare a valuation using recognised methods and financial forecasts.
- Factor in that employees are usually receiving a minority holding in an unlisted business, which may justify a discount.
The outcome is a per-share value that underpins the option grant.
- Explain the scheme to employees
Even a carefully designed EMI scheme won’t work if people don’t understand it. Take time to:
- Share the purpose of the scheme and how it fits with the company’s strategy.
- Explain in plain language what options are, how vesting works, and when they might be able to exercise.
- Clarify the potential risks as well as the upside, including the fact that the value of shares is not guaranteed.
Clear communication builds trust and helps employees see the scheme as a genuine opportunity.
- Draft and sign the EMI documentation
The legal and tax framework of the scheme is usually set out in:
- An EMI option plan or set of rules, which defines the overall structure.
- Individual option agreements, which specify the grant details for each participant, such as:
- Number of shares under option
- Exercise price
- Vesting conditions
- Any leaver provisions or performance hurdles
Well-drafted documents minimise ambiguity and reduce the chance of disputes later on.
- Notify HMRC on time
Once options have been granted, HMRC must be notified within the relevant deadline for the scheme to qualify as EMI. The timing depends on when the options were granted:
- For options granted before 6 April 2024: you must notify HMRC within 92 days of the grant date.
- For options granted on or after 6 April 2024: notification is due by 6 July following the end of the tax year in which the options were granted.
Missing these deadlines can mean losing the EMI tax advantages, so they should be treated as non-negotiable.
Getting Share Valuation Right For EMI
Valuation is one of the most technical parts of the process, but it is also one of the most important.
Working with valuation professionals
Most companies use an experienced accountant or valuation specialist to prepare the valuation. The goal is to arrive at a figure that:
- Reflects the underlying value of the business
- Follows an approach that HMRC is likely to accept
- Can be supported by financial forecasts and supporting information
Although there is a cost involved, proper valuation work provides certainty, especially if your business is on a fast growth trajectory.
Discounts and private company factors
In an EMI context, it is common to apply discounts for:
- Minority shareholdings: Small stakes usually carry fewer rights and are less attractive to outside buyers.
- Lack of marketability: Shares in a private company are not easily sold, which typically reduces their value.
These discounts can bring down the tax value attached to the options, potentially improving the outcome for employees without affecting the company’s real-world worth.
Agreeing the valuation with HMRC
Many companies choose to seek HMRC’s advance agreement to their valuation before granting EMI options. If HMRC accepts the proposed value, this:
- Reduces the chance of later challenges
- Gives employees reassurance that the tax basis of their options has been reviewed
- Helps everyone understand the numbers involved at the point of grant
A robust, well-documented valuation is a cornerstone of a successful EMI scheme.
Managing Your EMI Scheme After It’s Set Up
Creating the scheme is only the beginning. Ongoing management is needed to keep it compliant and useful. Key tasks include:
- Maintaining records: Keep detailed documentation of option grants, valuations, board approvals, and employee communications.
- Filing EMI returns: Submit the required annual EMI return to HMRC by 6 July each year, covering any grants, exercises, or cancellations in the previous tax year.
- Monitoring vesting and leavers: Track who is meeting vesting conditions, who has left the business, and how leaver provisions apply in each case.
- Reviewing scheme design: As the company evolves, you may want to refresh limits, eligibility criteria, or performance conditions to keep the scheme aligned with your goals.
Treating EMI administration as part of your regular governance processes makes it much easier to stay on top of the details.
Common Mistakes To Avoid With EMI
Despite the benefits, EMI schemes can run into problems if the rules are not followed closely. Typical pitfalls include:
- Missing HMRC notification deadlines: Late notifications can mean the options no longer qualify for EMI tax treatment.
- Using an unrealistic valuation: Overly aggressive or poorly supported valuations may lead to disputes or unexpected tax bills.
- Including ineligible employees: Granting EMI options to someone who does not meet the working time or shareholding tests can jeopardise the tax advantages.
- Weak or incomplete documentation: If option terms are unclear, disagreements can arise over what employees are actually entitled to receive.
The key to avoiding these issues is careful preparation, clear records, and, where necessary, taking professional advice before decisions are finalised.
Making EMI Work For Your Business
An EMI scheme is not just a legal structure; it’s a strategic tool. When designed thoughtfully, it can help you hire better people, reward long-term commitment, and create a culture where employees feel genuinely invested in the company’s success.
By checking eligibility early, taking valuation seriously, communicating clearly with employees, and keeping on top of your reporting obligations, you can unlock the full benefits of EMI without unnecessary risk or complexity.
