Employee Enterprise Management Incentives (EMIs)

Published / Last Updated on 08/06/2022

Enterprise Management Incentives (EMIs) approved by HMRC must satisfy the following criteria:

  1. Company must have assets of no more than £30 million
  2. Maximum Share Options that can be granted to employees and senior executives is £250,000 in a 3-year period.
    • If the Share Option Price granted is the market value at the time, then income tax or national insurance is NOT payable
    • If the Share Option Price granted is discounted on the market value at the time, then income tax and national insurance on that additional benefit IS payable.

Capital Gains Tax

In either of the above cases, once the employee has exercised their option and bought the shares, when they subsequently dispose of or sell the shares, capital gains tax may be payable subject to capital gains tax rates and their capital gains tax allowance.

Excluding Business Activities

Firms that are not permitted to offer EMIs are:

  • Banking.
  • Farming.
  • Property Development.
  • Legal Services.
  • Ship Building.

Example:

Alison works for Combined Tuna Fish & Whistle Limited.  Its market capitalisation is £29m.  The firm qualifies to offer EMIs.

Alison is offered share options over a 3-year period

  • Year 1 - £100,000 Share Options at £0.50.  The Market value of the shares at the time is £0.50.
  • Year 2 - £100,000 Share Options at £0.75.  The Market value of the shares at the time is £0.75.
  • Year 3 - £50,000 Share Options at £1.00.  The Market value of the shares at the time is £1.00.

Alison exercises her options and buys all the shares offered

  • Costs: Year 1 - 200,000 shares bought at £0.50.  Cost/Market Value £100,000.
  • Costs: Year 2 - 133,333 shares bought at £0.75.   Cost/Market Value £100,000.
  • Costs: Year 3 - 50,000 shares bought at £1.00.   Cost/Market Value £50,000.
  • She is within the £250,000 limit for options in that 3-year period, so no tax and national insurance is payable.
  • She has bought the shares at market value, so no tax and national insurance is payable.

5 years later, the share price has increased to £1.50.  Alison paid £250,000 and owns 383,333 shares.  383,333 X £1.50 = £574,999.50.  A gain of £324,999.50.

When Alison comes to sell/dispose of some or all the shares, capital gains tax will be payable at the current tax higher capital gains tax rate for shares of 20%.  She has made a huge ‘net’ profit.  Don’t forget, if more than £250,000 options had been granted within a 3-year period or if options were granted at a discount on market value, then income tax and national insurance would have been payable.

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