Alternatives to EMI options

EMI options are usually the best choice

Enterprise Management Incentives (EMI) options can offer significant tax advantages and flexibility for eligible companies and employees. They are widely used by private businesses to incentivise employees, align their interests with shareholders and reward long-term growth. However, EMI is not available to everyone, and alternative arrangements may be more appropriate depending on the business and its objectives.

Example of how tax on EMI options works:

Suppose an employee receives an option over 100 shares with a market value of £5,000 at grant. Five years later, the business is sold and the shares are worth £150,000.

If the option qualifies for EMI tax advantages, was granted at market value and is exercised in accordance with the applicable rules, there will generally be no Income Tax or National Insurance contributions on exercise. Capital Gains Tax may be payable when the shares are sold, depending on the circumstances and whether any relief is available.

If the option was granted at a discount, or the relevant EMI conditions are not met, an Income Tax charge and potentially National Insurance contributions may arise. The precise outcome depends on the terms of the option and the circumstances of exercise and sale.

Not everyone can qualify for EMI

Companies and employees must meet specific eligibility conditions. From 6 April 2026, the company limits generally increased to gross assets of no more than £120 million and fewer than 500 full-time equivalent employees. The total unrestricted market value of shares under qualifying unexercised EMI options is subject to a £6 million company limit. Individual employees are generally subject to a £250,000 limit over a three-year period.

The company must also satisfy the independence and qualifying trade requirements. Employees must generally work at least 25 hours a week, or 75% of their working time if less, and satisfy the material interest rules. Eligibility should be checked before options are granted.

Alternatives to EMI options

The starting point is to establish the business’s objectives and work backwards to identify the appropriate incentive. The company should also consider shareholder dilution, its articles and shareholders’ agreement, and relevant tax and reporting requirements.

Common alternatives include unapproved options, share awards and specially structured share classes known as flowering shares.

Unapproved options

Unapproved options offer flexibility but generally lack EMI’s tax advantages. Income Tax will usually apply to the difference between the market value of the shares on exercise and the exercise price. National Insurance contributions may also arise.

If an employee exercises an option when the shares are worth £150,000 and pays nothing to acquire them, the taxable employment-related gain may be £150,000. Further Capital Gains Tax may arise on a subsequent sale if the shares increase in value after exercise.

Example of tax payable on exercise of unapproved options

If an employee exercises a nil-cost option when the shares are worth £150,000, the employment-related gain may be subject to Income Tax and National Insurance contributions. The amount payable depends on the employee’s circumstances and the applicable rates.

Share awards

Share awards give employees shares directly. Shares acquired through employment for less than their relevant market value may trigger Income Tax and potentially National Insurance contributions. If the shares are appropriately taxed on acquisition, subsequent growth may be subject to Capital Gains Tax. Business Asset Disposal Relief may be available if the relevant conditions are met.

Example of tax payable on a gift of shares

If an employee receives shares worth £5,000 and sells them five years later for £150,000, Income Tax may arise on acquisition and Capital Gains Tax may apply to subsequent growth. The actual treatment depends on the valuation, share rights and applicable tax rules.

Flowering shares

Flowering shares are a specially structured class designed to increase in value when agreed milestones or targets are achieved. They can reward future growth while limiting the initial value of the interest awarded. Their tax treatment depends on the rights and restrictions attached to the shares and their market value when acquired.

Voting rights, dividends, transfer restrictions, forfeiture and rights on a sale or winding up should also be considered.

Example of tax payable on flowering shares:

If an employee receives restricted shares with a relevant market value of £1,000 and they later sell for £150,000, the initial tax treatment will depend on the applicable valuation rules and any elections made. Subsequent growth may be subject to Capital Gains Tax if the shares were appropriately taxed on acquisition.

The examples are illustrative only. The appropriate arrangement depends on the company’s objectives, the participants’ circumstances and the tax implications.

Gannons can help you compare employee share schemes, assess their tax implications and implement an arrangement suited to your business. We can also advise on valuations, share rights, dilution and the required documentation, with realistic fee estimates to help you manage legal costs.