Despite the current drop in the levels of venture capital investment, the UK remains a thriving hub for tech companies. The abundance of world-class tech talent in the UK makes it an attractive location for tech startups and established businesses alike. However, despite it being crucial to the success of tech companies, retaining and motivating key employees in this competitive market can be challenging and costly.

One popular way to motivate and reward key employees is through the use of Enterprise Management Incentive (EMI) schemes. These schemes offer tech businesses a unique opportunity to align their employees’ interests with the company’s growth while enjoying significant tax advantages. Whilst we have a guide that covers this in more detail, as well as EMI scheme alternatives, in this blog we’ll delve into the basics of EMI schemes and explore how they can benefit your tech company.

EMI Schemes: A Win-Win Solution

EMI schemes are share option schemes designed to incentivise and retain employees while offering significant tax benefits. They allow companies to grant share options to employees, giving them the right to purchase shares in the company at a predetermined price in the future. This equity-based approach is particularly valuable for early-stage tech companies looking to scale that may not have the resources to offer high salaries to compete with and attract employees from the big tech firms in the UK.

How EMI Schemes Work:

EMI schemes create a vested interest for employees in the company’s success, similar to shareholders. Here’s a headline overview of how they work:

  • Share options are granted to selected employees. Despite the grants, employees aren’t required to pay anything but they also won’t actually become shareholders until they exercise the option. Both the exercise price and the exercise event will be detailed within the option grants.
  • An exercise event takes place: commonly for EMI schemes within the tech industry, the exercise event will be a company exit, such as the full sale of the business or a share listing. However, it is possible for other time or performance-based milestones to be selected as the exercise event, dependent on the company’s objectives.
  • Options are exercised: once this exercise event takes place, the option holders can exercise their option and buy the shares for the pre-determined exercise price. Where there’s an exit and a third party will be immediately buying the shares from the employee, the employee will be due their share of the sale proceeds less their exercise price.

One of the key advantages of EMI schemes is their flexibility in defining exercise events, allowing companies to tailor them to specific goals or performance metrics. However, implementing EMI schemes requires meticulous planning, documentation, and compliance with HMRC regulations, making expert advice essential. There are plenty of other considerations and key points to understand when setting up an EMI scheme such as disqualifying events, bad/good leaver reasons and eligibility criteria and limits, so expert advice should always be sought.

Tax Implications:

Understanding the tax implications of EMI schemes is crucial for both employers and employees. Here’s a brief overview:

  • Grant of the option: No tax or NIC is payable when options are granted to the employees.
  • Exercise of the option: When the exercise price is at least as much as the market value of the options being granted, no tax or NIC is payable. Conversely, if the exercise price is less than the market value, tax will be payable.
  • Capital Gains Tax (CGT): When the employees actually sell their EMI-acquired shares, they may incur CGT, subject to allowances, exemptions and relief.
  • Additionally, corporations may benefit from tax relief when employees exercise EMI options, further enhancing the scheme’s appeal.

Of course, this is a general overview and exceptions can apply, so tailored tax advice should be sought for your circumstances.

Do you need help?

EMI schemes offer tech companies in the UK a powerful tool for attracting, retaining, and motivating key employees while enjoying substantial tax advantages. However, implementing an EMI scheme involves various considerations, from selecting the right scheme to crafting specific components tailored to your business’s needs. It should be noted that it’s not a one-off implementation exercise, as there are annual compliance requirements too.

If you have any questions or need further support, you can contact our friendly financial experts on 0845 606 9632 or email team@thesmartaccountants.co.uk for a no-obligation discussion on whether a share option scheme could work for you. For more information on Employee Share Option Schemes, covering EMI schemes, growth shares SIPs, CSOP, phantom shares and SAYE schemes also, download our comprehensive guide here.