Share Schemes · 2026/27
EMI Share Options UK 2026/27: Complete Tax Guide
Enterprise Management Incentives (EMI) are the most tax-efficient share option scheme available to eligible UK companies. Employees pay no income tax or National Insurance at grant or vesting -- CGT applies only when shares are sold -- and Business Asset Disposal Relief can reduce the CGT rate to 18%. This guide explains who qualifies, how the scheme works, and what happens at each stage from grant to sale.
What Are EMI Share Options?
Enterprise Management Incentives (EMI) are a HMRC-approved employee share option scheme designed to help smaller, high-growth UK companies attract and retain key staff by offering a meaningful equity stake. An EMI option gives an employee the right -- but not the obligation -- to buy a fixed number of shares at a pre-agreed price (the exercise or strike price) at some point in the future, typically on a company sale or IPO.
The key attraction is the tax treatment. Under EMI, there is no income tax or National Insurance Contributions (NIC) at the point of grant (when the option is given) or at vesting (when the option becomes exercisable). Tax only arises when the shares are actually sold, and it is Capital Gains Tax rather than income tax -- meaning rates of 18% or 24% rather than up to 45%.
HMRC introduced EMI in 2000 and periodically updates the rules. The current framework, in place for 2026/27, allows grants of up to £250,000 per employee and up to £3 million across the company. Most commercial small companies with gross assets under £30 million and fewer than 250 employees can participate.
Company Qualifying Criteria
Not every company can grant EMI options. The rules are broadly as follows for 2026/27:
- UK resident: the company (or qualifying subsidiary) must be UK tax resident.
- Trading company: it must carry on a qualifying trade. Excluded activities include property development, dealing in financial instruments, banking, insurance, legal and accountancy services, farming and market gardening, and running hotels or nursing homes.
- Gross assets: must not exceed £30 million at the time of grant.
- Employees: must have fewer than 250 full-time equivalent employees.
- Independence: must not be a subsidiary more than 51% controlled by another company, unless the parent itself qualifies.
If a company loses qualifying status after options have been granted (for example, gross assets exceed £30 million), existing options are not automatically disqualified, but no new qualifying grants can be made. Employees should exercise existing options within 90 days of a disqualifying event to preserve the tax advantages.
Employee Eligibility
Employees and directors who work at least 25 hours per week, or if less, at least 75% of their working time for the company, can receive EMI options. Broadly:
- The employee must be a genuine employee or director of the qualifying company or subsidiary.
- They must not hold more than 30% of the ordinary share capital of the company (a "material interest" test).
- Consultants and contractors who are not employees do not qualify.
Each qualifying employee can hold unexercised options over shares with a market value of up to £250,000 at the date of grant. Once that limit is reached, no further qualifying EMI options can be granted to that employee until some existing options have been exercised or lapsed.
Tax Treatment at Each Stage
At Grant
No income tax or NIC is due when EMI options are granted, regardless of whether they are granted at, above or even below market value. HMRC must be notified of every grant via the Employment Related Securities (ERS) online service within 92 days of the grant date. Missing this deadline causes the options to lose their EMI status.
At Vesting
EMI options typically vest over time (for example, monthly over 4 years after a 1-year cliff). Vesting is a commercial milestone, not a tax event. No tax is triggered when options vest.
At Exercise
Exercise converts the option into actual shares by paying the exercise price. Provided the option was granted at or above the Agreed Market Value (AMV) at the time of grant, there is no income tax or NIC on exercise. The employee simply acquires shares at the exercise price.
If options are exercised below AMV (a "discount" option), the discount element is treated as employment income and taxed via PAYE at the employee's marginal rate. Employer NIC is also due on the discount. This is uncommon in practice, as most EMI options are granted at AMV.
At Sale
When the employee sells their shares, Capital Gains Tax applies to the gain (sale price minus exercise price, adjusted for the CGT annual exempt amount of £3,000 for 2026/27). The CGT rates for 2026/27 are 18% for basic-rate taxpayers and 24% for higher and additional-rate taxpayers.
BADR at 18%: If Business Asset Disposal Relief applies (see below), the rate is a flat 18% on the first £1 million of lifetime qualifying gains, regardless of income tax band.
Business Asset Disposal Relief (BADR) and EMI
BADR (formerly Entrepreneurs' Relief) reduces the CGT rate to 18% on the first £1 million of lifetime qualifying gains. For EMI shares, the conditions are:
- The EMI option was granted at least 2 years before the disposal of the shares.
- The employee was an employee or director of the company throughout that period.
- The company was a trading company throughout.
Crucially, the normal BADR requirement to hold at least 5% of the ordinary share capital is waived for EMI shares. This means even an employee with a small percentage of the company can qualify, provided the 2-year option holding period (from grant, not from exercise) is satisfied.
Note that from April 2025, the BADR rate increased from 10% to 18% and will remain at 18% for 2026/27. The lifetime limit stays at £1 million.
Worked Example
Emma is a software engineer at a qualifying startup. In June 2024, she is granted EMI options over 50,000 shares at an exercise price of £1 per share (the AMV at grant). HMRC is notified within 92 days. The options vest monthly over 4 years.
In June 2026 (2 years after grant), the company is acquired and Emma exercises all her vested options, paying £50,000 for the shares. She immediately sells them at £5 per share (£250,000 total).
| Item | Amount |
|---|---|
| Sale proceeds | £250,000 |
| Less exercise price | £50,000 |
| Gross gain | £200,000 |
| Less CGT annual exempt amount | £3,000 |
| Taxable gain | £197,000 |
| CGT at 18% (BADR applies -- 2 years from grant) | £35,460 |
| Income tax on exercise | £0 |
Without EMI (using unapproved options), the £200,000 gain at exercise would be income subject to PAYE -- potentially taxed at 45% plus NIC, leaving Emma with far less.
HMRC Notification and Valuation
Two administrative steps are critical:
- Notify HMRC within 92 days of grant via the ERS online service. Late notification causes the options to lose qualifying status, exposing the employee to income tax on exercise.
- Agree the market valuation in advance. Companies can submit a non-statutory share valuation to HMRC before granting options. HMRC will confirm (or dispute) the value, giving certainty about the exercise price and ensuring the options are at or above AMV.
Annual ERS returns must also be filed by 6 July each year for the previous tax year, reporting all options granted, exercised, lapsed or varied. Failure to file results in automatic penalties from HMRC.
EMI vs Other Share Schemes
| Feature | EMI | CSOP | Unapproved |
|---|---|---|---|
| Limit per employee | £250,000 | £60,000 | No limit |
| Income tax at exercise | None (if at AMV) | None (after 3 yrs) | Full income tax + NIC |
| CGT at sale | 18%/24%; BADR 18% | 18%/24%; BADR rules apply | 18%/24% |
| Company size limit | Gross assets < £30m; < 250 FTE | Any listed or unlisted | No restriction |
| BADR 5% waiver | Yes | No | No |
For most qualifying small companies, EMI is the clear first choice. CSOP is useful where the company does not qualify for EMI (for example, if it is in an excluded trade or has assets above £30 million). Unapproved options are used where neither approved scheme fits, accepting the income tax cost at exercise.
Key Risks and Common Mistakes
- Missing the 92-day notification window: the most common and costly error. Set a calendar reminder the day options are granted.
- Granting to consultants: only employees and directors qualify. Misclassifying a contractor as an employee invalidates the options.
- Not agreeing valuation with HMRC: if the exercise price is disputed, HMRC may assert the options were below AMV, triggering income tax.
- Forgetting the annual ERS return: HMRC penalties apply automatically for late or missing returns.
- Assuming BADR automatically applies: the 2-year holding period runs from grant, not exercise. If the company is sold less than 2 years after grant, BADR will not apply.