An Introduction to Enterprise Management Schemes (EMI).

Most companies setting up a share scheme for their key employees will use a share option plan. That is a right to acquire shares in the future at a fixed price, normally today’s value. The better the company’s performance after the option has been granted, the more its shares should grow in value, the more the business has grown by that date, the more the shares will be worth.

So the benefit for the employee is the ability to buy higher-value shares at a lower cost. Generally speaking, the design of the option plan is up to you, so you could make it so if the employee leaves before the future date that you set, the option lapses or you could decide that you will allow some or all of it to be exercised. Many companies do not permit any exercise at all before an exit, in other words, the sale of the company or its listing on the stock exchange.

If your company qualifies, we would suggest you begin looking at an EMI option. This is short for Enterprise Management Incentive. We recommend this because it has major tax advantages for both the employer and the employee. Employees will only pay Capital Gains Tax on the eventual value of their reward, when they eventually sell their shares which is at a lower rate than income tax. In the case of EMI, it can be as low as 10%.

There is also the potential to use the Annual Capital Gains Tax Exemption, currently around £12,000. To reduce the tax further, employers will pay no national insurance on the exercise of a market value option, providing the option holder remains with their company at the time of exercise.

So how do I know if my company is eligible for EMI?

Not all companies are eligible for EMI. If your company is independent, that is not a subsidiary of another company, has total assets of less than £30 million, fewer than 250 employees, and a business that isn’t on the list of excluded trades, there is a good chance it will qualify.

Excluded trades include those involving finance, investment activity, and/or the licensing of individual property rights that have been purchased from an external source rather than created by the company in-house.

Who in my company is eligible to receive EMI options?

Any employee is eligible if they work full-time in the business. Full-time for these purposes means they are contracted to work 25 hours a week or more. If they work less than 25 hours, they may still qualify. This is providing they devote 75% of their time to their work to the business. So for example, if they work 2 days a week and they spend the rest of their time in other work, they won’t qualify. But if they spend the other 3 days fishing, they will.

Non-executive directors, contractors, consultants, and other advisors do not qualify. Nor do people providing their services through a company.

If this is a concern for you, do get in touch as we can advise on alternative incentives in these cases.

What do I do if EMI isn’t available?

If your company isn’t permitted to grant EMI options because it is too large or is not engaged in qualifying trade, an alternative called a CSOP (Company Share Option Plan) may be available instead. The tax benefits are similar to EMI, although here the Capital Gains Tax rates will be 10% or 20%.

What if options aren’t the right solution?

For some companies, these options won’t work, either because they aren’t eligible for EMI or CSOP, or simply because they prefer to have immediate share ownership, but if this is the case they will have other options.

If share value is relatively low, it may be feasible for employees to receive free shares or buy them with a small personal financial cost. In a company’s early years or months, before it has started making profits, this may be workable

An alternative is that employees could purchase shares but not immediately pay for them.

How can we find out more?

If you’d like to find out more about what kind of share scheme might work in your company, we have a number of additional short animated tutorials that will give you the information you need.

Postlethwaite’s are a law firm specialising in employee share ownership. We are employee-owned ourselves and we feel that this makes the company to fulfilling and engaging place to work, benefiting our own business. Get in touch!

Postlethwaite is an employee-owned firm of UK solicitors focusing on employee ownership, employee share schemes and share option schemes.  You will find here a series of videos that help explain the alternative solutions available to you when considering employee share schemes or employee ownership.