How EMI schemes can help your business keep key employees
‘The Great Resignation’, an influx of employees leaving their jobs in unprecedented numbers over the last few years.
Since the pandemic, many people have re-evaluated their priorities, seeking better work-life balance, more meaningful roles, flexible working and growth opportunities. This trend shows no sign of slowing and reflects a broader shift in generational expectations in the workplace.
This wave has affected businesses of all sizes, but smaller companies, particularly those in more specialist fields, can feel a much larger impact. Finding and keeping the right people has become one of the biggest challenges for SMEs. Losing talented employees can disrupt growth, affect consistency across the business, and create gaps that are difficult to fill.
What’s the solution?
Nothing ever is a guarantee, but there are some tried and tested ways to give your team a stronger reason to stay and remain motivated.
One of the most effective tools is an EMI (Enterprise Management Incentive) scheme. This is a government-approved share option scheme, which allows businesses to grant selected employees the right to buy shares in the company at a future date at a discount (or even todays price).
By giving employees a stake in the business, it gives them more incentive for contributing to the growth in the company and hopefully staying in the long run. This incentive isn’t something that would particularly be easy to give up. If the shares increase in value, employees can reap significant gains upon selling them.
Can’t I just grant normal share options? Why is it tax efficient?
You can grant normal (unapproved) share options, but EMI options are specifically designed to make employee ownership more tax efficient for both the business and the employee – so why wouldn’t you choose EMI if you could?
Under a non-approved scheme:
On exercising their options, the employee has to pay income tax and NICS at rates of up to 45%*.
On sale, CGT at up to 24%* would be due based on the Market Value, less any amounts subject to income tax.
A CT deduction can usually be made for the company, based on the amount on which the employee is subject to income tax.
Under an EMI scheme:
On exercising their options, if done within 10 years of the grant, with no disqualifying event, and no discount at grant, there will be no income tax or NICS on exercise.
CGT is payable on the sale of the shares, but only up to 24%* (with the potential to claim a lower rate of 14%** Business Asset Disposal Relief, with less strict conditions under EMI).
A CT deduction can usually be made for the company, based on the difference between the market value when the shares were acquired and the amount the employee paid for them.
*based on current rates as of October 2025
**subject to increase to 18% from 6th April 2026
How does my business set this up?
Before granting EMI share options, a business first needs to confirm it meets the eligibility criteria. The company must be an independent trading entity with gross assets of £30 million or less and fewer than 250 full-time equivalent employees. There are also conditions relating to the employees themselves, so it is important to involve a suitably qualified tax adviser to ensure compliance before moving forward.
While there is no formal HMRC approval process for EMI schemes, it is possible to agree the share valuation in advance. This is an area where experienced advisers can add real value, helping to reduce risk and ensure the scheme is structured effectively.
Companies are required to notify HMRC within 92 days of granting options, and there is also an annual reporting requirement to maintain compliance.
You would need to consult a solicitor to assist in drafting the relevant legal documentation, such as the option agreements, to ensure the scheme is legally robust.
Will it fit the needs of my business?
One of the biggest advantages of an EMI scheme is its flexibility. The structure can be tailored to the business’s goals and workforce, allowing it to be a powerful retention and motivation tool. For example:
The number of options or timing of exercise can be linked to individual or corporate performance targets.
Exercise may be tied to specific events or milestones, ensuring alignment with the company’s growth objectives.
In short, an EMI scheme can be designed to fit the unique needs of each business, providing a tax-efficient way to reward and retain the employees who are most critical to its success.
Next Steps
If you’re looking for ways to retain key employees and reward their contribution to your business, an EMI scheme could be the solution. If you want to find out more, please get in touch.
The company was growing quickly and profits were increasing year on year. To incentivise employees the management wanted to put in place a share scheme.
Issue
The management wanted the up-front cost to be as low as possible.Unfortunately advance assurance from HMRC was not available.
How we solved it
We suggested issuing various classes of growth shares to the employees at nominal value. These shares only had value once a certain hurdle rate had been reached in the future which meant that on issue the shares only had par value.
The outcome
The employees were able to sell shares once significantly above the hurdle and achieve capital gains tax treatment(and a 20% tax rate) rather than income tax treatment under the Employment Related Securities legislation (at tax rates of up to 8.75%/33.75%).
A Guide to Share Schemes: What are they, and how do they work?
In today’s fast-paced business world, attracting and keeping top talent is more challenging than ever. Companies need to offer more than a competitive salary—employees want to feel invested in their workplace. That’s where share schemes come in. These schemes not only motivate employees by giving them a direct stake in the company’s success but also provide valuable tax benefits for both the business and its workforce. But with so many options available, how do you choose the right one? Let’s look at the most popular share schemes in the UK.
Types of Share Schemes
Save As You Earn (SAYE) – A Risk-Free Way to Invest
Imagine a savings account that rewards you with discounted company shares at the end—this is essentially how SAYE works. Employees commit to saving a fixed amount every month (up to a maximum of £500) over a three- or five-year period. At the end of the term, they can use their savings to buy shares at a pre-agreed price, often at a discount – HMRC will allow a discount of up to 20%. The best part? No Income Tax or National Insurance (NI) is due on the difference between the purchase price and market value, and Capital Gains Tax (CGT) only applies when selling the shares. For those looking for a low-risk, disciplined way to invest in their company, SAYE is a solid choice.
For companies looking to promote a culture of ownership, SIPs provide an excellent solution. Employees can receive shares through various means: Free Shares awarded by the company, Partnership Shares purchased by the employee, Matching Shares provided by the employer as a bonus, and Dividend Shares reinvested from dividends earned. The longer shares are held within the SIP, the greater the tax benefits. If employees keep their shares for at least five years, they won’t have to pay Income Tax, NI, or CGT when they sell them. Employers also benefit from Corporation Tax relief. SIPs are a great way to align employees’ interests with the long-term success of the business.
Enterprise Management Incentives (EMIs) – The SME Powerhouse
For small and medium-sized enterprises (SMEs), EMIs are one of the most tax-efficient ways to reward key employees. Under this scheme, employees receive share options at a pre-agreed price, without having to pay Income Tax or NI at the time of the grant. When they eventually sell their shares, they only pay CGT—often at a reduced 10% rate if they qualify for Business Asset Disposal Relief (BADR). However, please note the rate of BADR is increasing to 14% from April 2025 and 18% from April 2026. Employers can also claim Corporation Tax relief. EMIs are designed to help smaller businesses attract top talent without the high upfront costs of traditional salary increases.
Company Share Option Plan (CSOP) – A Flexible Middle-Ground
Larger companies that don’t qualify for EMIs often turn to CSOPs. This scheme allows employees to purchase shares at a set price, with tax advantages if they meet the required holding period. However, the purchase price of these shares is restricted to £60,000 due to the savings from the relief Employees won’t pay Income Tax or NI if they hold their options for at least three years before exercising them. While CGT applies on sale, tax relief may be available. Employers also benefit from Corporation Tax relief. CSOPs are ideal for businesses looking for a structured yet flexible share incentive plan that works across different employee levels.
Growth Shares & Unapproved Share Schemes – A Tailored Approach
Not every business qualifies for HMRC-approved share schemes, but that doesn’t mean they can’t offer equity incentives. Growth shares allow employees to benefit from future increases in company value while starting at a lower initial valuation, which helps reduce tax liabilities. Unapproved share schemes, on the other hand, offer more flexibility but come with higher tax costs, with Income Tax and NI due upon exercise. While less tax-efficient, these schemes can be structured to suit fast-growing businesses looking for bespoke incentive plans.
How to Choose the Right Scheme
Selecting the right share scheme depends on several factors. Company size plays a key role – EMIs are perfect for SMEs, whereas larger companies may benefit more from CSOPs or SIPs. Employee retention goals also matter; if a company wants to encourage long-term loyalty, a scheme like SIPs might be ideal. Tax efficiency is another crucial aspect – approved schemes typically offer greater tax benefits than unapproved ones.
Share schemes aren’t just about financial incentives, they create a sense of ownership, motivation, and alignment between employees and the business. Whether you’re an employer looking to implement a tax-efficient reward scheme or an employee considering participation or already participating, understanding the tax implications is crucial. With the right planning and advice, share schemes can be a game-changer for both businesses and their teams.
Want to explore the best share scheme for your company? Please contact us to arrange a free consultation call.
In times where cash is tight clever employers will look for alternative ways to attract and retain their key people which do not cost them significant amounts of cash. One such route is to consider bringing your key people into the ownership of the business.
A look of horror
The first reaction for many owner-managers is a look of horror – “why would I give away a part of my business to someone – it’s my baby and I have grown it from nothing?” It’s a fair point but maybe a better question might be “if I gave Janet or John 10% of my business, would their extra effort mean that I would have 90% of a bigger pie?” That is the fundamental equation that any business owner should consider – do I think these more highly motivated and incentivised employees will drive my business so much further forward that my 90% will be worth more than 100% of the business if they weren’t so motivated or, worst still, they got a better offer from somewhere else?
Of course there are no certainties so in the end it becomes a judgement call – but in a tight labour market this extra opportunity for those employees might be the difference between keeping them or losing them…
So what exactly is a share scheme?
As the name suggests, a share scheme is a way of allowing your key employee(s) to share in the ownership of the company in some way. The aim might be to allow them to receive dividends as a bit of an extra income boost, or it may be to allow them to share in the proceeds of a sale when the time eventually arrives. There are many different alternatives (more details below) – which is the “right” one will very much depend on what the business owner is trying to achieve – and what will actually motivate the employee(s) in question…
Communicate, communicate, communicate
Whatever share scheme structure you adopt the key to success (aside from getting the right advice in setting it up) is communicating with the employees who will participate. Too often we see share schemes of one flavour or another implemented, but the employees concerned simply do not understand what it means to them. When employees don’t understand then there is a real risk they will not place any value on their participation in the scheme, meaning in turn that it is highly unlikely to have the effect the employer is looking for. The whole process then risks being a waste of time and money…
Ensuring that you communicate effectively to the participants exactly what is in in for them means that they are far more likely to understand and place value on the opportunity you are giving them. We would generally suggest leaning on your professional advisers in this situation so that they can meet with the participants, explain the benefits and answer any questions. This return on this small extra investment can be extremely significant.
“All employee” share schemes
Most share schemes tend to be aimed at specific individuals who are key to the business but there are a couple of alternatives which are intended to be available to the whole of the employee base. A Save as You Earn scheme allows employees to access tax benefits by saving an amount of money each month to purchase shares in their employing company. A Share Incentive Plan on the other hand allows an employer to give free shares to their employees, or allow employees to “buy” shares out of their pre-tax pay.
The reality is…
The reality is that both schemes are rather complex and involve a lot of administration, and so are usually the preserve of larger employers. However, we have seen these schemes successfully implemented in smaller business where the schemes align with the wishes of the business owner.
“Tax advantaged” share schemes
EMI schemes
Turning to look at more targeted schemes, these can be roughly split into those which carry statutory tax advantages and those that do not. For SMEs the most common tax advantaged scheme is the Enterprise Management Incentive or EMI scheme. This is a share option scheme – so the employee does not get shares, they instead get a right to buy those shares in the future for a fixed price (known as exercising the option).
The big benefit for an EMI scheme is that the exercise price for the option (the price at which the shares can be bought) can be set at the market value of the shares at the time of issue of the options (often with a significant discount to the full price because of minority holdings etc). Generally, if this were done the employee would pay income tax when they buy the shares on the difference between the price they pay and the value of the shares at that time. Under an EMI scheme however there is no income tax at that point – instead the shares are subject to capital gains tax when they are sold.
The employing company can also get a tax deduction for the difference between the amount paid for the shares and the value at the time they are acquired – which can amount to a substantial sum.
There are a lot of qualifying conditions to meet – the scheme is aimed only at smaller companies and generally at those who spend pretty much all of their working time working for the employer in question. It also does not apply to some “lower risk” industries (apparently accountancy firms are low risk and so can’t qualify for EMI schemes!)
CSOPs
EMIs are a great option (pardon the pun) for those looking to provide equity awards to employees in a tax efficient way. However because of the qualifying conditions not all businesses can implement an EMI. The bigger brother of the EMI scheme is the Company Share Ownership Plan. This is an option scheme as well and there are fewer restrictions on the size and type of company that can use them.
The conditions around the options however are more complex, and the value that can be given is more restrictive, so these schemes are more rarely implemented by SMEs and even then only when the EMI can’t be used. Nevertheless, they do give tax advantages and should not be ruled out as an alternative in the right circumstances.
Non-tax advantaged shares schemes
As the name suggests, these are share schemes that do not carry specific tax advantages set out in legislation. That is not to say however that at least some of the these schemes cannot be set up in a tax efficient way.
At its most basis level a non-tax advantaged share scheme can simply be giving free shares to an employee. The employee will generally be subject to income tax on the difference between the price they pay (if any) and the value of the shares they are given. In most SME situations the amount they are taxed on is not subject to PAYE and NIC, but these rules can be complex and it is important to be sure. There can also be additional complications if the shares have restrictions on them (for example limiting the ability to sell the shares) – the “restricted securities” rules carry some big traps for the unwary so proper advice is essential.
Some employers will grant their employees options over shares which do not qualify for either the EMI or CSOP rules. Often but not always these will be granted by an overseas employer where the scheme rules do not meet the CSOP requirements. Where this is the case the employee pays income tax when they exercise the options, again on the difference between the price paid and the value of the share at the time. The same rules apply re PAYE and NICs, and again care is needed not to fall foul of the restricted securities rules.+
Growth shares
The most common form of non-tax advantaged share schemes for SMEs is the growth share. Very broadly a growth share allows the holder access to capital value in the shares only once the value of the company exceeds a fixed (“hurdle”) amount. So for example an employee may have growth shares giving them 10% of the value of the company when that exceeds £5 million. If the company value stays below £5 million then the employee has no right to value – but once it exceeds that figure their value kicks in and they get 10% of any value over that amount.
The key in growth shares is to set the hurdle amount at a figure that means the shares have minimal value at the time they are issued – to avoid an income tax charge arising on the employee. Setting the hurdle at the current company value is important as increasingly HMRC will argue (probably fairly) that there has to be some value whether it be “hope” value in respect of future growth, or the expectation of dividends.
At the same time if the hurdle is too far above the current value of the company then the risk is that this becomes a disincentive to the employee who sees little prospect of their shares ever starting to be worth something… The hurdle amount can be a fine judgement call so again it is important to get the right advice to avoid tears later…
When set up properly growth shares can be a powerful tool to protect the value created by the owners to date but incentivising the employee because their interests are now directly aligned with those of the business owner…
Reporting employee share schemes
One final practical word – most employee share schemes carry reporting requirements which although not especially onerous can be overlooked or ignored. In some cases the risk is that the company receives a fine for failing to meet its obligations, but in others (specifically the EMI scheme) the tax advantages for the employee and employer can depend on making the correct notifications to HMRC. It would be a real shame to fall at the final hurdle having done all of the hard work!
Next Steps
If you are an employer looking for alternative ways to attract and retain employees that won’t cost you a significant amount of cash then get in touch. Our team at ETC Tax will be able to guide you as to what is best for your business wiht regards to employee share schemes.
In times when cash is tight employers often look to different ways to reward and incentivise their employees. Giving an employee a share in the value of the company can be a useful way to give them a direct link between their efforts and the value of those shares. The more they contribute, the more the value of their shares grows.
Often the thought is “let’s keep this simple and just give them some free shares” – what could be easier? This approach leads to some nasty traps for the unwary. These can undermine the whole purpose of giving those shares in the first place.
Are they really “free”?
At its most basic level, the value of the shares given to the employee is treated as taxable income for income tax purposes. If the employee pays for the shares but pays less than market value they are taxed on the difference between the amount paid and the market value.
The value can be reduced by a “minority discount” for small percentages of shares. This is because small shareholdings do not give any control over the company they are typically worth less than their proportionate share of the overall value. Even with a discount though an employee having to pay tax on something they thought was free is likely to be a bit “disappointed.”
In most private company situations the tax is payable on the employee’s tax return and there is no national insurance. However, where there is a ready market for the shares – say where there is an offer on the table for the company – then the tax may be payable through the PAYE system AND also carry National Insurance. In this situation, HMRC may also be more reluctant to agree to a minority discount on the value.
Restricted shares
In former times employers would artificially reduce the value of the shares given to employees. This is done by placing restrictions on them. e.g The shares can only be sold after a certain period of time or only if certain conditions have been met. Shares with this sort of restriction would be worth less on the open market and so the tax bill would also be reduced.
HMRC however got wise to this and the restricted securities rules were introduced. These apply, in summary, where shares are issued subject to restrictions. If at a later date those restrictions are lifted then the shares will increase in value. These rules then kick in and tax the increase in value caused by the removal of the restrictions. Often this may only happen when the shares are sold and the employee is expecting to pay capital gains tax at lower rates than income tax. Finding that an element of the gain is actually subject to income tax (and probably national insurance in the case of a sale) is going to be an unpleasant surprise.
Elections, elections
Tax law does allow for a “get out of jail (almost) free” card on the restricted securities rules. This is known as a section 431 election. Signing this election when the employee gets their free shares takes those shares out of the restricted securities rules so there is no income tax charge which arises when the restrictions are lifted. So surely signing the election is a real “no-brainer”?
There is a downside to the election though. It can create a tax charge at the time the shares are issued. Essentially the election deems the value of the shares at the time of issue to be worked out ignoring any restrictions. So, if a share is worth £5 with the restrictions and £6 without, the value will be £6 at that point for tax purposes. If the share is given for free the employee will pay income tax on £6 rather than £5. While if they pay £5 for the share they will still be taxed on the extra £1.
Generally, this will be a small price to pay to give protection against future, potentially much larger income tax charges when the restrictions are lifted – but the s431 election is not a one-way street. It is important to remember that there is no way to get that extra tax back in the future should the share drop in value.
But what if…?
Presumably, if an employer is contemplating giving their employee free shares that employee will be high-performing and the relationship will be a strong one. The free shares will hopefully improve that employee’s engagement in the business and drive even better performance.
However, relationships sadly do sour. The last thing the employer needs is an employee to leave and take that share with them. This is where a shareholders agreement becomes essential. It governs things like what happens if the employee leaves, how disputes are resolved and what the employee can do with their shares while they own them. A shareholders agreement is like an insurance policy. Why? Because you hope you never need it but you will be glad you have it if you do…
What are the alternatives?
Free shares may seem like a simple option to reward employees without parting with any cash. They undoubtedly have their merits. There are, however, other alternatives which can be implemented which have much the same effect. This is without (for example) the up front tax charge or the hassle of putting a shareholders agreement in place.
Tax-advantaged option arrangements such as the Enterprise Management Incentive scheme are often a great choice for those looking to give their employees a piece of the pie. Growth shares are also available which give the benefits of share ownership but manage that initial tax position. The key is understanding what the aim of the exercise is and finding the solution that fits.
In summary…
Share incentives for employees are a really useful way to reward, retain and incentivise key employees. It also keeping the cash cost to the business under control. Structured correctly and with a clear understanding of the objective of the exercise they can drive employee engagement and create real value. The aim of the game is to increase the overall value for everyone. Getting it wrong and implementing a plan that causes the employer or employee issues can have exactly the opposite effect…
Next Steps
As with all such matters the value of getting good advice far outweighs the cost! Please do not hesitate to contact ETC Tax for further advice.
In this article, we explore some of the current “hot topics” in tax, ranging from how to spend surplus cash, to dealing with complex VAT issues.
Surplus Cash – A Nice Problem to Have!!!
The issue: we are increasingly speaking to business owners who have found themselves accumulating surplus cash or investments within their trading companies.
While this may seem like a great situation to be in, managing this excess cash efficiently and planning for its tax efficient use often require proper thought.
Things to think about: many clients want to use surplus cash to assist future generations and/or to provide an alternative income stream in retirement. One way to achieve this is for clients to set up a Family Investment Company (FIC). There are of course a number of tax considerations here, including whether to use a Holding Company (HoldCo) or a new company (NewCo) and how to move cash/assets tax-efficiently between companies. Inheritance Tax (IHT) planning is often a key consideration also.
Retaining talent
The issue: Finding and retaining skilled staff is a growing challenge for many business owners and firms have to think creatively to ensure that they have access to the best talent pool.
Things to think about: Enterprise Management Incentive (EMI) schemes and growth share arrangements have become two increasingly popular ways of incentivising key employees. (click here for further articles on EMI). There are a number of tax and commercial issues to consider including valuation (approval by HMRC is needed for EMI valuations), EMI advance assurance, and employment related securities issues. Commercially clients need to think about how and when shares will be awarded i.e will performance criteria apply?
Post-Covid Comings and Goingsof Complex Tax Issues
The issue: The COVID-19 pandemic has reshaped the way people live and work. This has led to important considerations related to tax residence and domicile.
Things to think about: When dealing with residence and domicile issues, individuals and businesses need to consider things like the difference in tax terms between a permanent and a temporary move and the effect on their income tax position; what happens to any assets they own in the UK (particularly UK properties) and social security implications.
For those leaving the UK, tax equalisation issues can be complex.
Domicile and deemed domicile status are also important considerations.
Increased HMRC scrutiny
The issue: HMRC, is becoming increasingly proactive in its efforts to ensure tax compliance. This includes more and more “nudge” letters, as well as more comprehensive enquiries, compliance checks, and discovery assessments.
Things to consider: Taxpayers should be aware that there really is “nowhere to hide” as HMRC continues to gather wider powers to share data with third parties, such as Companies House.
Specific HMRC campaigns continue to target certain sectors, from online traders to property income and gains.
It’s essential to act quickly to mitigate penalties but taxpayers and their advisers should also tread carefully so as to ensure they don’t give away more information than they need to.
Accidental landlords and the IHT time bomb
The issue: Whilst the government may be talking about abolishing IHT, in the meantime, there are lots of individuals out there with significant buy-to-let property portfolios who may find themselves facing substantial Inheritance Tax (IHT) liabilities.
Things to consider: While there’s no IHT magic wand to wave, it’s crucial to start planning early and consider strategies which allow individuals to “reset” the seven-year clock for potentially exempt transfers. Growth shares can also present significant IHT opportunities.
VAT – The Forgotten Tax?
The issue: Value Added Tax (VAT) is often underestimated in its complexity, with many business owners and their advisers lacking a deep understanding of VAT beyond basic VAT returns.
Things to consider: For online traders, knowing when to register for VAT can be challenging. Specific industries, such as financial services and land and property, have their own intricate VAT rules. Recent cases, like Sonder Europe Limited v HMRC and Hotel La Tour highlight the importance of staying on top of VAT case law to ensure that clients are kept informed of opportunities for VAT recovery where those may not have previously existed.
Conclusion
Whether your clients are dealing with surplus cash, navigating staff retention challenges, dealing with residency issues, facing increased HMRC scrutiny, looking for help with IHT planning, or grappling with complex VAT, there are always opportunities to talk to them about tax and to enhance the value of the services you offer by providing your client with informed choices.
Remember, when it comes to tax matters, knowledge is power. We are here to help, do get in touch.
