Tax Glossary

Enterprise Management Incentive (EMI)

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Last updated on:
March 17, 2024

The Enterprise Management Incentive (EMI) scheme offers a valuable opportunity for employees to participate in the growth and success of their companies. By receiving share options as part of an EMI scheme, employees can benefit from significant tax advantages, making it an attractive component of a compensation package.

Understanding EMI Share Options

  • What is an Option? An option under the EMI scheme is a right, but not an obligation, to buy shares at a future date at a predetermined price, known as the strike price.
  • Tax Advantages: The key benefit of EMI options is the absence of Income Tax and National Insurance contributions on the acquisition of shares at the strike price. Additionally, a favorable Capital Gains Tax (CGT) rate of 10% applies on any profit made upon selling the shares.

How EMI Options Function

  1. Granting of Options: Imagine you join a startup and are granted 1,000 EMI share options with a strike price equal to the current market value of £10 per share.
  2. Exercising Options: You decide to exercise these options a year later when the share value increases to £15 per share. Despite the increase, you're not liable for Income Tax or NI on the difference due to the EMI scheme's benefits.
  3. Selling Shares: If you sell your shares years later at a value of £50 per share, your profit would be £40,000. The first £3,000 of the gain is tax-free, with the remaining profit taxed at the beneficial CGT rate of 10%, resulting in a tax payment of £3,400.

The Impact of the EMI Scheme on Profits

Participating in an EMI scheme can significantly reduce the tax burden associated with share options, thereby increasing your take-home profits. Without the EMI scheme, you would face a higher tax liability, including Income Tax, NI on the initial gain, and a higher CGT rate on the sale of shares.

Key Takeaways

  • The EMI scheme facilitates employee ownership in a tax-efficient manner, encouraging alignment with the company's goals and success.
  • The tax benefits provided by the EMI scheme enhance the attractiveness of share options as part of an employment package, particularly for startups and growth companies.
  • Employees looking to maximize their benefits from share options should consider the timing of exercising and selling shares to optimize tax advantages.

The EMI scheme represents a win-win for both employers and employees, promoting company loyalty and allowing employees to share in the financial success of their workplace.

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