EMI scheme (Enterprise Management Incentive)

Is the UK startup ecosystem a world leader? The figures certainly suggest so.
According to the Office of National Statistics, there are more than 11,000 high-growth startups in Britain. Dealroom ranks the UK third globally for VC investment, behind only the US and China, with 70% of that investment taking place in London.

These impressive stats are the result of deliberate efforts to make the UK an attractive place to do business. One of the UK government’s best-known and most successful initiatives is the Enterprise Management Incentive (EMI) scheme.

In this article, we’ll explain the ins and outs of EMI schemes and EMI share plans, from the eligibility criteria and grant limits to the process of legal adoption.

What is an EMI scheme?

EMI, which stands for “Enterprise Management Incentive”, is a UK government-approved share option scheme. The EMI scheme provides a tax-efficient way to reward, incentivise and retain talented employees. To reap the benefits of EMI, a company and its employees must meet certain eligibility criteria set by HM Revenue and Customs (HMRC).

EMI eligibility criteria

To qualify for EMI tax relief, your company must:

• Have fewer than 250 full-time employees

• Have £30M or less in gross assets

• Have allocated no more than £3M worth of EMI options

• Have a permanent establishment in the UK

• Be independent (i.e. not owned or controlled by another company)

• Operate a qualifying trade or service (learn more about excluded trading activities)

To receive tax-friendly EMI options, your employees must:

• Spend at least 25 hours per week (or 75% of their time) working for your company

• Own no more than 30% of your company’s ordinary shares

• Not exceed the £250k limit for EMI (or Company Share Option Plan (CSOP)) grants within a three-year period

→ Check whether you’re eligible for the EMI share scheme

EMI scheme benefits

The EMI scheme is widely regarded as the best share scheme in the UK, with benefits to both employers and employees.

EMI benefits for employers:

• No tax upon granting and no employer’s National Insurance Contributions (NIC)

• Corporation tax relief on the difference between the market value and strike price when the options are exercised

• Corporation tax deductions on the costs of setting up and managing the scheme

EMI benefits for employees:

• Lower tax costs than cash bonuses or share option grants that don’t qualify for EMI (i.e. unapproved options)

• No income tax or employees’ NIC when the options are granted or exercised (where the exercise price is at or above market value)

• Reduced capital gains tax (10% instead of 20%) upon sale of the shares (for grants held for two years or more)

The best way to secure these benefits is to set up your EMI scheme with the help of qualified share plan providers. Skipping any important steps puts your plan at risk of not qualifying for EMI, in which case option grants could become a tax burden for your company and its employees. What’s more, having a watertight EMI share plan reduces the need for grant-level variance in terms, which can put some grantholders at an unfair advantage or disadvantage to others. 

How to set up an EMI scheme

An EMI share plan is your framework for granting share options to employees through the EMI scheme. It defines the rules, requirements and limits of your EMI share scheme, and is unique to your business.

You must set up your EMI share plan completely before issuing any EMI options. This includes getting the plan legally adopted by your board and shareholders, as necessary, and ensuring you have a valid company valuation approved by HMRC. Securing “pre-clearance” for option grants ensures that HMRC will not in future challenge the exercise price set upon issuance, therefore mitigating any tax risk and uncertainty. Note that EMI valuations expire 90 days after HMRC approval or whenever a material event occurs, so you’ll need an updated valuation to continue awarding equity in compliance with UK tax regulations.

EMI scheme rules

An essential part of the process is preparing your share plan rules, which capture the specifics of your EMI scheme and define every term used in your plan documents. 

Your EMI share plan rules should specify:

• What makes a good leaver or a bad leaver

• The class of shares to be granted as options

• When a grantholder is able to exercise their options

• How the grant is treated if the company is acquired

You can customise elements of your share plan to suit your company’s needs, but it’s essential to stay within the limits of the EMI scheme.

EMI scheme documents

Once you’ve decided how to configure your share plan, you’ll need to prepare a number of legal documents. At a minimum, these should include:

• Share plan rules – the blueprint for a share scheme, specific to each company

• Board resolution – the formal record of a board of directors’ decision to adopt an EMI share plan and authorise the creation of an option pool

• Notice of option grant – a document outlining the details of each award (e.g. number of options granted, strike price, exercise rules and vesting schedule)

• Notice of exercise – a document that confirms the exercise of options into shares, specifying the number of options being converted

You may also need:

• Investor consent – explicit consent from investors and other relevant stakeholders to establish the share plan

• Shareholder resolution – permission from shareholders to sub-divide existing shares (if needed) and allocate newly formed shares to an incentive pool

Adopting a share plan

To finalise your EMI share plan, it needs to be legally adopted by your board of directors. Board adoption can vary from company to company, and the level of consent needed from investors will be determined by your existing constitutional documents or shareholders’ agreement.

Typically, you’ll need to:

• Convene your board to discuss the proposal

• Take minutes at the board meeting

• Pass a shareholder resolution

• Secure shareholder authorisation for the option pool

Notifying HMRC of your EMI share plan

When setting up a new EMI share scheme, you need to register the plan with HMRC. You can do this through the HMRC Online Services portal.

Companies are required to notify HMRC of EMI options issued before 6 April 2024 within 92 days of the grant date. However, for EMI options granted on or after 6 April 2024, you simply need to submit one EMI notification for each tax year – along with your EMI annual return – by the following 6 July.

EMI share plans with Carta

If you’re ready to set up your EMI share plan, Carta can help. With the support of our in-house experts, you’ll be able to design your EMI scheme, get a HMRC-approved valuation, prepare the documentation and begin issuing equity to your employees – all on a single platform. Sign up to Carta today and you’ll be ready to issue EMI options in a matter of weeks.

Prepare your plan

Request an EMI share plan and you’ll be connected with a Carta analyst. They’ll guide you through the necessary preparations, including:

• Assessing your likelihood of qualifying for EMI

• Ensuring that equity is available to issue

• Establishing the rules of your scheme

Carta will then generate the required documents using our market-standard templates. These can be tailored to your EMI scheme rules, within certain parameters.

Adopt your plan

To complete the process, you must legally adopt the plan as a company. Carta's involvement in this stage is minimal, but your analyst can help you understand what’s needed and provide document templates for this purpose.

Publish your plan

Once adopted, your plan needs to be reflected in your account. We’ll help you generate your share plan on the platform and adjust the settings to match your scheme rules. With that complete, you’re ready to grant equity to your employees. A Carta analyst can walk you through the process if needed.