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  • Writer's pictureRomesh Jeyaseelanayagam

EMI Schemes – a great way to incentivise your staff


EMI Schemes – a great way to incentivise your staff, brought to you by The FD Consultant. We are a collective of Fractional CFO advisors.

Introduction


The Enterprise Management Incentive Scheme. Sounds complicated, right?

It’s not, and it’s a great idea for your business to consider.

Put simply, an Enterprise Management Incentive (EMI) Scheme is a government approved employee share scheme which is a cost effective, highly flexible, and tax efficient way to reward your employees.

 

Overview


Enterprise Management Incentive schemes are a share option scheme backed by HMRC, and a popular tool used by UK businesses, particularly startups and small to medium-sized enterprises (SMEs).


Already adopted by over 14,000 businesses in the UK, these schemes are designed to align the interests of employees with those of the company, fostering a sense of ownership and commitment to the company's success.


The share options granted by the scheme give your employees the right to buy shares in your company in the future at a certain pre-agreed price (the ‘exercise’ price). The idea is that they can buy the share (‘exercise the option’) after it has risen in value - at the lower pre-agreed price - then sell it on at current market value.


This allows the employees to cash in on the price difference between the lower agreed exercise price of the share option and the actual current value of the share (assuming the share price has risen).


There are significant tax benefits to this approach.

 

Eligibility


A number of qualifying conditions need to be met by a business to adopt this type of scheme. It is clear that this scheme is set up to assist growing enterprises rather than large corporations.


An EMI scheme is only be available to employees or directors of a qualifying business who work a minimum of 25 hours per week or 75% of their total available working hours.


The qualifying company must be UK based and actively trading, with fewer than 250 full time employees within the business.


The business must own less than £30m in gross assets.


Certain sectors are excluded from the scheme, eg Property development, and financial services such as Banking, insurance, investment.


The conditions listed above are headline qualifiers and not exhaustive. If you are interested in creating an EMI scheme, we recommend further research to fully understand the eligibility criteria.


However, don’t be put off - a significant proportion of SME’s should qualify for the scheme, as evidenced by the high take up rate amongst this type of business.

 

Benefits


Share your success with the team


By offering a stake in the company's future growth, EMI schemes can help retain key employees and motivate them to contribute to the company's success. There is a potential for significant gains for employees if the company’s value increases.


An easy way of granting equity


This type of scheme allows equity ownership benefits without having to issue new shares on a regular basis once an initial share option pool has been set up with the plan.


Attract and retain talent


A great way to motivate your senior leadership team is to offer them a clear pathway to benefit from the success of the company. The team will feel a sense of ownership, and the recipients of an EMI scheme don’t have to be limited to senior team members. Retention of key staff is critical in ensuring consistency of knowledge and experience. Reducing staff churn is not only efficient for the business, but also cost saving.


Align interests


EMI schemes align the interests of employees with those of shareholders, promoting a culture of ownership and long-term thinking.


Flexibility


EMI Schemes can be tailored to meet the specific needs of the company, and you can set up the granting of share options to reflect, for example, performance or length of service targets attained. Other criteria, including setting vesting periods can also be included within the scheme. Companies can also design EMI schemes that scale with the growth of the business.


Cost effectiveness


There are no significant cash outflows for the business, which is particularly beneficial for startups and growing businesses with limited cash reserves. Setting up an EMI scheme doesn’t have to be expensive. Using an online solution, costs can be around £2,500 to set up with ongoing subscription costs to maintain the programme.


Tax benefits to employees and business


Both parties enjoy preferential tax treatment with the adoption of an EMI scheme.


The Employee pays no tax (income tax or national insurance contributions) when options are granted, only when they’re exercised. Upon exercising the option, employees may be liable for Capital Gains Tax (CGT) on the difference between the sale price and the exercise price, benefiting from the lower CGT rates compared to Income Tax rates.


The business gets a CT deduction on the set up costs of scheme, and also the difference between the market value of the shares at exercise versus the amount the employee paid for them.

 

Implementation


The first stage is valuation. Determine the current market value of the company's shares to set the exercise price for the options.


The plan must then be designed, which includes drafting the EMI scheme rules, including eligibility criteria, performance conditions, and vesting schedules. Once the plan is created, it is essential to obtain approval from the company’s board of directors for the EMI scheme.


The next step is to notify HMRC of the grant of EMI options within approximately 3 months of the grant date. Finally, implementing the scheme involves the communication to eligible employees. The business will issue option agreements to eligible employees, outlining the terms and conditions of their options.



Summary


EMI schemes provide significant benefits for both employees and employers.

For employees, they offer tax-efficient, potentially lucrative opportunities to share in the company's growth.


For employers, EMI schemes are a cost-effective tool for attracting, retaining, and motivating key talent, while also providing tax advantages and aligning employee and company interests.


By giving employees the opportunity to share in the company's growth and success, EMI schemes can drive engagement, loyalty, and performance, ultimately contributing positively to the company's prosperity over the long term.

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