There is a growing demand for employees with the right skills and talents as the labour market sees a surge in job vacancies – making it difficult for some employers to retain their most talented team members.

An important aspect of maintaining an effective workforce is recognising and rewarding your best employees but constraints on cash flow and other challenges may make a pay rise difficult.

That is why many businesses are seeking out alternative benefits for their staff that do not harm cash flow or significantly increase the tax bill of the company or the individual.

An Enterprise Management Incentive (EMI) scheme is one such way that a business can reward success in a tax-efficient manner.

The EMI scheme is a Government-approved, tax-advantageous share option that is predominantly designed for small to mid-sized UK businesses looking to share the financial success of the company with their team. 

The tax advantages of an EMI scheme

When a company establishes a scheme, it selects employees and gives them the option of acquiring shares over a prescribed period.

This brings with it tax benefits, such as:

  • No Income Tax or National Insurance charge on the exercise of an EMI option for an individual as long as it was initially granted at market value.
  • Where the shares increase in value between the time of grant and when the options are exercised, the uplift is not charged to Income Tax or National Insurance. 
  • There will be a Capital Gains Tax (CGT) charge when the employee disposes of their shares if the sale price exceeds the value per share at the time of granting the options – CGT is at a lower rate than Income Tax.

An employee may also qualify for Business Asset Disposal Relief on up to £1 million of Capital Gains and pay Capital Gains Tax at a fixed rate of 10 per cent if the following conditions are met:

  • The option was granted at least two years before disposal of shares;
  • The company was a trading company or holding company of a trading group for the two years immediately before disposal;
  • The employee is still working for the company when the shares are sold.

There is no requirement for the employee to hold five per cent of the share capital of the company for Business Asset Disposal Relief purposes, providing the option is exercised within 10 days of the cessation of employment.

However, all of these tax advantages may be lost if the company:

  • Fails to establish its EMI scheme within the terms of the legislation;
  • Does not notify HM Revenue & Customs (HMRC) within 92 days of the grant of an EMI option, or
  • A disqualifying event occurs and option holders fail to exercise their share options within 90 days.

Who can utilise this tax-efficient scheme? 

A business can utilise an EMI scheme if it meets various conditions including the following:

  • 249 or fewer employees.
  • Gross Assets of less than £30 million.
  • Not majority-owned or controlled by another company.
  • Having a UK permanent establishment.
  • Be a qualifying trading company or holding company of a trading group. 
  • Have qualifying subsidiaries if it is a holding company.
  • Not in an excluded industry (banking, farming, property development, provision of legal services, shipbuilding, or leasing.)

There is also a £3 million limit to the total value of share options held by all employees.

Employees must also:

  • Work at least 25 hours per week or 75 per cent of total working time as an employee of the company.
  • Not hold more than 30 per cent of the company’s shares.
  • Not hold share options worth more than £250,000 at the time of grant.

If you are unsure of your business’s eligibility or suitability for employee share schemes, please contact your Seymour Taylor representative today or email or call 01494552100.

This blog is for guidance only, professional advice should be obtained before acting on any information contained herein. The information was correct at the time of publishing 1 November 2021.

Posted in Blog news.