{"id":131634,"date":"2021-08-20T00:00:00","date_gmt":"2021-08-20T00:00:00","guid":{"rendered":"https:\/\/gs:8890\/academy\/the-tax-advantages-of-an-enterprise-management-incentive-emi\/"},"modified":"2024-08-06T16:39:08","modified_gmt":"2024-08-06T15:39:08","slug":"the-tax-advantages-of-an-enterprise-management-incentive-emi","status":"publish","type":"post","link":"https:\/\/www.jpmorganworkplacesolutions.com\/uk\/insights\/the-tax-advantages-of-an-enterprise-management-incentive-emi\/","title":{"rendered":"The\u00a0Tax\u00a0Advantages of an Enterprise\u00a0Management\u00a0Incentive (EMI)"},"content":{"rendered":"

The Enterprise Management Incentive (EMI)<\/strong> is the UK share option scheme<\/strong> popular with growing companies that want to reward and incentivise their employees through equity compensation<\/strong>.<\/p>\n

An EMI scheme gives employees the option to buy an agreed number of company shares at a fixed price and at a fixed date. This option to buy shares may be based on the employee meeting\u00a0certain criteria, such as performance targets,\u00a0time requirements, or employee exits.\u00a0An individual company must also meet\u00a0certain conditions\u00a0to qualify for the scheme.<\/p>\n

Among those conditions are\u00a0that the company cannot be controlled by another company, its gross assets cannot be worth more than \u00a330 million, it must have fewer than 250 full-time employees,\u00a0and\u00a0it must be carrying out a qualifying trade.<\/p>\n

Other key conditions include\u00a0a \u00a3250,000\u00a0limit in the\u00a0market\u00a0value of options\u00a0that can be\u00a0issued to any eligible employee,\u00a0an overall limit of \u00a33 million, an understanding that options must be exercisable within 10 years, and that those options must be for ordinary, irredeemable shares.<\/p>\n

For our full breakdown on\u00a0EMI\u00a0schemes<\/a>, check our complete guide.<\/p>\n

The scheme has been growing in popularity in the UK, and one of the reasons for its prevalence is due to its generous tax advantages that benefit both the employer and employee.<\/p>\n

EMI Tax\u00a0Advantages for\u00a0Employers<\/h2>\n

Corporation Tax Relief<\/h3>\n

Companies that offer an EMI share scheme to their employees are eligible for Corporation Tax (CT) relief on any EMI options that are exercised. The CT relief is the difference between the agreed original share value at the time of the award and the market value at the time the option is exercised. Typically, the agreed share value at the time of the award is the restricted market value or the nominal value. Depending upon how the share price has moved over time, CT relief ultimately accruing to the company might translate into a substantial sum.<\/p>\n

If the employee is\u00a0awarded\u00a0the\u00a0options at market value, the CT relief will be the amount\u00a0that is tax applicable.\u00a0Additionally, if the employee is granted options at a discounted\u00a0rate of\u00a0market value, CT relief is applied to the value of the discount\u00a0and the amount that would have been tax applicable.<\/p>\n

Tax\u00a0Advantages for\u00a0Employees<\/h2>\n

Income Tax and National Insurance Contribution<\/h3>\n

EMI options are income-tax-free when they are first granted, and the employee does not have to pay a National Insurance Contribution (NIC). Once the options are exercised, they may be obligated to pay these fees. This is determined by the exercise price.<\/p>\n

    \n
  1. If the exercise price is\u00a0the same as\u00a0or above the actual market value (AMV) at the time of the\u00a0award,\u00a0income tax and NIC is not due.<\/li>\n
  2. If the\u00a0exercise price is below the AMV at the time of the award and the shares are convertible notes, income tax and NIC are applied to the difference in the two values.<\/li>\n
  3. If the exercise price is below the AMV at the time of the award and the shares are not convertible notes, income tax is applied to the difference in the two values.<\/li>\n<\/ol>\n

    Entrepreneur\u2019s Relief<\/h2>\n

    As part of an EMI scheme, employees are eligible for a discounted rate of\u00a0Capital Gains Tax (CGT)\u00a0when they\u00a0exercise\u00a0their options. CGT is usually 20%, but in this\u00a0scenario,\u00a0it is applied at 10%. This is known as Entrepreneurs\u2019 Relief.<\/p>\n

    If the shares are acquired more than\u00a090 days after a\u00a0disqualifying event, the Entrepreneur\u2019s Relief\u00a0is no longer applicable.<\/p>\n

    Tax Benefits of EMI Options Versus Unapproved Option Schemes<\/h2>\n

    The advantages\u00a0of\u00a0EMI options\u00a0become\u00a0even more apparent when we compare how the tax scenario plays out for an employee\u00a0under this kind of scheme as opposed to an unapproved option scheme. The difference can be stark, with an EMI likely\u00a0to ultimately prove far more lucrative.<\/p>\n

    No tax liabilities arise at the point where options are granted, whether it is an EMI or unapproved option scheme; however, their paths diverge at the point when those options are exercised. With an EMI, tax only falls due when the shares are eventually sold, whereas, with an unapproved scheme, a tax liability becomes due at the point when the options are exercised. Also, when the shares are sold, under an EMI scheme, CGT is set at 10%; meanwhile, if the scheme is unapproved, the corresponding levy is 20%.<\/p>\n

    These two differences lead to the respective scenarios playing out very differently. Yes, in the end, employees will benefit under both schemes, but compared to an unapproved scheme, not only will employees almost certainly end up pocketing more under an EMI, they will experience far fewer headaches along the way.<\/p>\n

    A significant saving for participants<\/h2>\n

    In the final calculations, a person in an EMI scheme will have to pay 10% tax rates on the profits they make due to Entrepreneur’s Relief and Capital Gains, while a person in an unapproved scheme is subject to regular income tax rates of 40% when awarded the options and also subject to Capital Gains Tax if they sell them for a profit.<\/p>\n

    For a person who is awarded \u00a3100,000 of share options, for example, the difference between being in an EMI versus paying regular income tax (or in an unapproved scheme) will be tens of thousands of pounds owed the HMRC over the scheme’s lifetime.<\/p>\n

    Enterprise Management Incentives, Simplified<\/h2>\n

    We have the necessary expertise and experience to help you make a success launching your EMI, at every step along the way.<\/p>\n

    You can rest assured that you are taking full advantage of the benefits on offer with the EMI scheme and continue to do so as you grow as a company, working with experts like here in Global Shares<\/strong> and using our enterprise incentive management software.<\/a><\/p>\n


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    \n<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

    The Enterprise Management Incentive (EMI) is the UK share option scheme popular with growing companies that want to reward and incentivise their employees through equity compensation. An EMI scheme gives employees the option to buy an agreed number of company shares at a fixed price and at a fixed date. This option to buy shares […]<\/p>\n","protected":false},"author":3,"featured_media":131635,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[544,620,624],"tags":[548,713],"class_list":["post-131634","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-employee-share-plans-uk","category-hr-uk","category-tax-and-compliance-uk","tag-all-uk","tag-emi-uk"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.jpmorganworkplacesolutions.com\/uk\/wp-json\/wp\/v2\/posts\/131634","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.jpmorganworkplacesolutions.com\/uk\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.jpmorganworkplacesolutions.com\/uk\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.jpmorganworkplacesolutions.com\/uk\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.jpmorganworkplacesolutions.com\/uk\/wp-json\/wp\/v2\/comments?post=131634"}],"version-history":[{"count":0,"href":"https:\/\/www.jpmorganworkplacesolutions.com\/uk\/wp-json\/wp\/v2\/posts\/131634\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.jpmorganworkplacesolutions.com\/uk\/wp-json\/wp\/v2\/media\/131635"}],"wp:attachment":[{"href":"https:\/\/www.jpmorganworkplacesolutions.com\/uk\/wp-json\/wp\/v2\/media?parent=131634"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.jpmorganworkplacesolutions.com\/uk\/wp-json\/wp\/v2\/categories?post=131634"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.jpmorganworkplacesolutions.com\/uk\/wp-json\/wp\/v2\/tags?post=131634"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}