You can help attract and retain your key employees by rewarding them with a tax favoured scheme – an Enterprise Management Incentive (EMI).
An EMI share option scheme provides significant tax advantages for your employees. Put simply, an ‘EMI’ scheme is by far the most tax beneficial structure for staff having been introduced in order to assist growing companies in attracting and retaining key employees, and to reward those employees for taking the risk to work for such companies.
How does an Enterprise Management Incentive (EMI) scheme work?
Very simply put, an EMI scheme works by getting your company to sign a legal agreement with an employee that gives them a right to buy a set number of the company’s shares at a given price at some point in the future. The right to buy the shares ‘vests’ on that future date, so the employee can buy them immediately or they can wait until a later date, perhaps the day that the company is acquired (an ‘exit’ event), in trade sale, management buyout or even a flotation on a stock exchange. This means that your key employees will feel more committed to the company and are all working towards a common goal.
If two employees were granted with shares worth £5,000, at a value agreed with HM Revenue and Customs (HMRC). Under non-EMI circumstances, the employee can be taxed as much as 45% based on PAYE, whereas shares purchased under the EMI scheme are tax free and only Capital Gains Tax (CGT) is chargeable at 10%.
Therefore, over a span of five years, the share value increases to £50,000, giving the individual a total gain of £45,000 when sold. Without the EMI scheme, just over £20,000 is taxed leaving the individual with just over £24,000. The EMI scheme is significantly more favourable as just under £5,000 is taxed leaving the employee with over £40,000 after CGT.
There are a number of conditions that must be met and approved by HMRC in order to be registered for the scheme. To qualify:
- The company must carry out a qualifying trade. There are several trades excluded from the scheme including: financial, legal, farming and property development
- The total gross assets of the company must not exceed £30million
- The total value of the share options granted must not exceed £3million
- The company can be either listed or unlisted
- The company must have less than 250 employees working at least 25 hours per week
- An individual cannot have a material interest in the company. No individual should have a share capital which exceeds 30%
- The maximum value of shares held by an employee should not exceed more than £250,000
- The option must be exercised within 10 years in order to receive tax advantages. A tax clearance from HMRC can be obtained if there are any doubts on conditions being met
Advantages of an Enterprise Management Incentive (EMI)
The EMI scheme offers several advantages to your key employees:
- Relief on Income Tax and National Insurance on shares up to the value of £250,000
- The only tax the employee will be liable to pay is CGT. This will be charged at the Entrepreneur’s Relief rate of 10%
- An employee can use their annual CGT exemption allowing them to save further. For the employer, the EMI scheme can be a cost efficient way to reward employees
- The scheme is flexible and can be tailored and structured to best meet the demands of the employer
- Share options are a desirable incentive as they help to keep key employees within a company
- Your company can receive a reduction in corporation tax on the difference between the market value of the shares sold to employees and the exercised price
In short, EMI schemes are an ideal way for small and growing businesses to offer an extra incentive to their employees, to reward their commitment and loyalty. For further information and advice on EMIs, please contact Lee Manning at firstname.lastname@example.org.