An EMI or Enterprise Management Incentive share option scheme provides a host of significant tax advantages to employees who are options holders, in turn significantly increasing the share scheme’s incentive value.
Simply put, an ‘EMI’ scheme is the most tax efficient structure for staff members offering them the most significant benefit.
The EMI came about in 2000 and was introduced to assist growing businesses in retaining key employees and also to offer them the chance to reward staff for taking the risk that comes along with working for such companies.
The principle tax benefit of an EMI scheme is that workers don’t need to pay income tax that would ordinarily be charged on the estimated market value of any shares or options given to them.
If employees receive options under an approved EMI scheme the only thing they will be charged is a capital gains tax at 10% on the increase in the value of their shares.
This value is agreed with HMRC, upfront, as part of the setup of an EMI.
How does an EMI scheme function?
Non-EMI
EMI
£5,000
SHARES ARE AWARDED
Leo gets granted options worth £5,000 at a value agreed with HMRC.
£5,000
45%
TAX
Under an EMI scheme, Leo would be charged 10% Capital Gains Tax on any profit only when he sells the shares.
Without an EMI scheme, he would be charged PAYE of up to 45%.
10%
INCREASE IN VALUE
The value of the shares rises to £50k.
£25,000
after tax
SHARES ARE SOLD
When the shares are sold, Leo makes a gain of £45,000 net of the cost of his shares.
Under an EMI scheme, he would pay under £4,000 in tax subject to having an unused exempt amount for the year.
Without the EMI scheme, Leo may have to pay out over £20,000 in income tax.
£46,000
after tax
