By Sarah Feeney
May 9, 2025
What Tax Benefits does an EMI Option Scheme bring?
In our previous blog we outlined how to implement an employee share option scheme. In this blog, we will consider what tax benefits an EMI options scheme allows. EMI options were first introduced under the Finance Act 2000, and are one of the most popular ways for companies to remunerate their employees due to their favourable tax treatment.
FLEXIBILITY
EMI options are extremely flexible and can be tailored to meet a company’s specific objectives. They allow companies to grant options (rights to acquire shares) to qualifying employees on a highly tax efficient basis for both the employer and participating employees.
COMMERCIAL JUSTIFICATION AND LIMITATIONS
EMI legislation dictates that EMI options must be granted for commercial reasons such as recruitment or retention of an employee, and not as part of a scheme or arrangement whereby the main purpose of which is the avoidance of tax. The tax legislation which governs how EMI options are used is called the EMI code. An employee must work for the company for at least 25 hours per week, or if less, 75% of their working time. However, employees cannot be granted EMI options if they have a “material interest” in the company. Furthermore, EMI options cannot be granted to non-executive directors or consultants. There are specified limits on the number EMI options that employees can hold. The current EMI individual limit is £250,000 on unexercised EMI options over shares.
TAX INCENTIVCES
For Companies, the tax incentives available come in the form of corporation tax deductions which are exercised in accordance with the Corporation Tax Act 2009. Tax relief is given in the accounting year in which the options are exercised, and can be claimed by the company. The tax deduction is equal to the gain the employee makes.
- For employees, the tax incentives, are three-fold; (1) on grant, (2) on exercise, and (3) on disposal.
- On grant, there is no income tax or national insurance liability. In contrast, were a company to pay a bonus to the employee, it would be subject to income tax and national insurance, and would decrease the amount the employee receives.
- On exercise, there is no income tax liability if the exercise price was at least equal to the market value of the shares at grant.
- On disposal, there may be a capital gains tax liability on the sale of the shares for any gain over the market value at grant. However, the qualifying period for business asset disposal relief (BADR) which was formerly known as Entrepreneurs Relief begins on the date on which the options are granted, rather than when they are exercised, and the shares are actually acquired.
BUSINESS ASSET DISPOSAL RELIEF
The qualifying conditions for BADR to apply for EMI option holders also provide that, unlike other shareholdings, it is not necessary for the shareholder to have a minimum 5% shareholding.
Entitlement to BADR means that the first £1m of gains on disposal of the shares are taxed at a capital gains tax rate of 10% rather than 20%. It is important to note that there are always caveats and option holders will experience difficulties retaining the many benefits of EMI if a disqualifying event occurs. This can happen without their knowledge and an income tax liability can be triggered if the options are not exercised within 90 days of a disqualifying event. Many company directors are not aware of all the conditions which must continue to be met and as a result they can be inadvertently breached.
CONCLUSION
The tax advantages, as noted above, are why implementation of an EMI option scheme can be very lucrative for companies and employees. EMI option schemes remain a tax efficient way to remunerate employees.
If you would like to discuss the information outlined in this blog post, please get in touch with Daniel from our corporate team.
