Enterprise Management Incentives (EMI): a strategic tool for business growth

Holly Chadwick, Solicitor

In the competitive landscape of modern business, retaining top talent is just as important as attracting it. One strategic approach used by many UK-based small and medium-sized enterprises (SMEs) to incentivise and retain key employees is the Enterprise Management Incentive (EMI) scheme. EMI options provide a tax-efficient, performance-based reward system that aligns employee motivation with long-term business goals. In the tax year ending 2023, HMRC reported that the total number of companies operating Employee Share Schemes was 19,990 (an increase of 7% on the tax year ending 2022).

HMRC established EMIs scheme with three core aims;

• to allow smaller companies to compete more effectively with larger companies for highly skilled employees;
• to help smaller companies retain key members of staff; and
• to help develop and grow smaller businesses.

Who can use EMIs?

To grant shares under an EMI arrangement, a company, including one incorporated outside the UK, must:

• be independent of other companies i.e., be the holding company;
• have gross assets of less than £30 million at the time of grant;
• have fewer than 250 employees at the time of grant;
• be a trading company, or the parent company of a trading group, not engaged in any  ‘excluded activity’ which includes banking, farming, property development, provision of legal services and ship building,

and employees granted EMI options must work at least 25 hours a week or, if less, 75% of their total working time must be devoted to the business.

There are also other more financial caps and limitations and EMI options must be exercisable within 10 years of the date of grant.

Key Benefits of EMIs

1. Tax efficiency for:

The Company: Corporation tax deductions may be available, equal to the gain the employee makes.

The Employee: No income tax is payable on the grant of the option and no income tax is payable on exercise, provided the option was not granted at a discount. On disposal of EMI shares, the increase in value from the market value at date of grant to the sale price, will usually be liable to capital gains tax and can qualify for business asset disposal relief.

2. Alignment of Interests – EMIs can directly link employee rewards to company performance which encourages loyalty, motivation, and a long-term perspective.
3. Flexibility – EMI schemes can be tailored to suit strategic goals of the company; they can be conditional on performance targets, time-based vesting period or the occurrence of specific events such as an exit.
4. Attracting top talent – EMIs can allow start-ups and small businesses to compete for high-calibre staff by offering long-term financial incentives.