How does an EMI share option scheme work for small company employees?

Full answer

EMI schemes are the most popular tax-advantaged share option arrangement for UK small and growing companies, designed specifically to help smaller businesses attract and retain talented staff without needing to pay large cash salaries or bonuses upfront. **Company eligibility conditions** To grant EMI options, a company must have gross assets of £30 million or less, fewer than 250 full-time equivalent employees, and carry out a qualifying trade (certain trades are excluded, including most property investment, banking, farming, and a handful of other specified activities) -- the company must also be independent (not a subsidiary of a larger group beyond certain limits) and not have options outstanding beyond the £3,000,000 total company limit. **Employee eligibility conditions** Employees must work at least 25 hours a week for the company, or if less, at least 75% of their total working time, and must not (together with associates) already hold more than 30% of the company's shares before the option is granted, since EMI is designed to incentivise genuine working employees, not existing significant shareholders. **Tax treatment at grant -- no charge** When an EMI option is granted, there is generally no Income Tax or National Insurance charge, provided the option is granted at or above the market value agreed with HMRC at the time (or, if granted below market value, the discount is taxed, but the tax-advantaged treatment otherwise still broadly applies to the remaining value). **Tax treatment at exercise -- no charge (if granted at market value)** When the employee exercises the option (converts it into actual shares, usually triggered by a sale event, IPO, or a specific vesting date), there is generally no Income Tax or National Insurance charge either, provided the option was originally granted at market value -- this is one of EMI's biggest advantages over unapproved share option arrangements, which typically DO trigger Income Tax and NI at exercise on any increase in value. **Tax treatment on eventual sale -- Capital Gains Tax, often at BADR rate** When the employee eventually sells the shares, any gain (the difference between the sale price and what they paid, typically the market value at grant) is subject to Capital Gains Tax rather than Income Tax -- and, importantly, EMI shares can qualify for Business Asset Disposal Relief (18% rate for 2026/27, rather than the standard 18%/24% rates that now apply generally, following the alignment of CGT rates) even where the employee holds less than the normal 5% minimum shareholding usually required for BADR, provided they meet the EMI-specific relaxed BADR qualifying conditions (including having held the option for at least two years). **HMRC valuation agreement** Companies typically agree the market value of their shares with HMRC in advance of granting EMI options (via a formal valuation submission), which provides certainty about the tax treatment and avoids later disputes about whether options were genuinely granted at market value. **Registering the scheme** EMI options must be formally notified to HMRC within 92 days of grant to retain their tax-advantaged status -- missing this deadline can be fatal to the scheme's intended tax treatment, so timely administration is critical. **Worked example** A startup grants an early employee EMI options over shares worth £50,000 (agreed market value) at the time of grant. Four years later, the company is acquired, and the employee exercises their options and immediately sells the resulting shares for £400,000. No Income Tax or NI is due at grant or exercise; Capital Gains Tax applies to the £350,000 gain, and because EMI shares qualify for the relaxed BADR conditions, this may be taxed at 18% rather than being treated as ordinary income taxed at up to 45% plus NI, representing a substantial tax saving compared with an unapproved option arrangement. **Practical tip** Get specialist advice before setting up an EMI scheme, since eligibility conditions (for both company and employees) are detailed and strictly enforced, and errors in valuation, notification timing, or scheme rules can result in losing the valuable tax-advantaged treatment retrospectively.

Try the calculator

More answers

• What is a close company for UK tax purposes and why does it matter?