How are EMI share options taxed for employees?

Full answer

EMI is the most tax-advantaged employee share option scheme available in the UK, specifically designed to help smaller, higher-growth companies attract and retain staff by offering a meaningful stake in the business without an upfront tax cost. **No tax on grant** When an employee is granted EMI options (the right to buy shares at a fixed price in future), there is generally no Income Tax or National Insurance charge at that point, regardless of how the option's value might grow before it is exercised -- this is a key advantage over some other forms of share-based reward, which can trigger tax liabilities at grant or vesting. **No tax on exercise, if priced correctly at grant** Provided the option was granted with an exercise price at or above the shares' market value AT THE TIME OF GRANT (agreed with HMRC in advance via a valuation), exercising the option (actually buying the shares) also generally triggers no Income Tax or National Insurance charge, even if the shares have increased significantly in value between grant and exercise -- if the exercise price was set BELOW market value at grant, an Income Tax (and NIC) charge can arise on exercise on the discount. **Capital Gains Tax on eventual sale** When the shares are eventually sold, any gain (sale price minus the exercise price paid) is taxed under Capital Gains Tax rules, not Income Tax -- this is generally far more favourable than Income Tax rates, especially for higher earners, and is the central tax benefit that makes EMI schemes attractive to both companies and employees. **Business Asset Disposal Relief on EMI shares** EMI shares can qualify for Business Asset Disposal Relief (BADR), taxing the gain at the lower BADR rate rather than the standard CGT rates, PROVIDED the shares have been held for at least the qualifying minimum period (generally counted from the date the option was GRANTED, not from when it was exercised, which is a specific EMI advantage over the standard BADR qualifying conditions for other share types) and other BADR conditions are met. **Which companies can offer EMI** EMI is restricted to smaller companies meeting specific conditions around gross assets, employee numbers, and being in a qualifying trade (certain trades, such as property development and some financial activities, are excluded) -- larger or excluded-sector companies cannot offer EMI and would need to consider other, less tax-advantaged share scheme structures instead. **Worked example** An employee is granted EMI options over shares worth £1 (market value) each at the time of grant, with the exercise price also set at £1. Three years later, the company has grown significantly and the shares are worth £10 each. The employee exercises the option, paying £1 per share as agreed, with no Income Tax charge on exercise since the exercise price matched market value at grant. If they then sell immediately, the £9 per share gain is taxed under CGT rules, potentially at the lower BADR rate if the qualifying holding period (from grant) and other conditions are met. **Practical tip** If offered EMI options, check that the company has followed the correct valuation and HMRC notification process at grant (errors here can jeopardise the favourable tax treatment), and keep records of the grant date and agreed market value, since these underpin both the tax-free exercise and the BADR qualifying period calculation.

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