Enterprise management incentives FAQs

Enterprise management incentive (EMI) schemes offer a tax-efficient way for growing businesses to attract, retain, and motivate key employees. In this blog, we answer the most common questions about EMI—from eligibility and valuation to scheme design and tax benefits. You can also watch the full webinar hosted by our share schemes team for a deeper dive into how EMI could work for your business.

Overview of an enterprise management incentive scheme

What is an enterprise management incentive (EMI) scheme?

An EMI scheme is a tax-advantaged share option plan designed to help smaller, high-growth companies attract and retain key employees.

What are “options”?

An option gives an employee the right (but not the obligation) to buy shares in the future at a fixed price (the exercise price). Employees don’t pay anything when the option is granted—they only pay when they choose to exercise the option and acquire the shares.

Why use EMI?

EMI is popular with start ups and early-stage companies because:

• It’s cost-effective compared to cash bonuses
• It offers significant tax savings (more on that later)
• It helps align employees with the long-term vision of the business
• It’s attractive to experienced talent familiar with high-growth exits

Key starting points

When setting up an EMI scheme, you’ll need to consider:

• Valuation of the company and shares (usually agreed with HMRC)
• Who will participate (typically senior staff, but flexible)
• When options can be exercised (e.g. on exit or after a time period)

Common terms

• Exercise: The point when the employee buys the shares by paying the exercise price. Until then, they only hold the right to buy.
• Vesting: Options may become available gradually over time (e.g. 25 shares now, 3 more each month). Some schemes skip vesting and allow full exercise on a sale.
• Plan Rules & Option Agreements: These documents set out the terms, including when and how options can be exercised.

What’s the difference between EMI and ordinary options?

In essence, there is no difference. An option is the right to buy shares in the future. However, the EMI wrapper provides attractive tax benefits that are useful for smaller companies in attracting employees to their business. With regular options, the gain is typically taxed as income at the point of exercise, usually under PAYE. In contrast, most EMI options are not taxed at exercise and the eventual gain at sale is taxed as a capital gain.

• Income tax / PAYE applies to ordinary options
• CGT applies to EMI options
• EMI tax treatment mimics ownership from day one so that you mostly access the lower CGT rates but without the risk for employees

Who can qualify for EMI?

If you’re thinking about setting up an enterprise management plan, there are a few main qualifying areas to be aware of.

Company requirements

To qualify, your company must meet certain size and activity limits:

• Gross assets must be less than £30m
• You must have fewer than 250 full time employees
• Your company must be actively trading (no investment)
• Operating in an eligible sector. Some sectors are not allowed such as property development, energy generation, farming and accountancy
• The company must be independent. Parent companies can qualify in some cases
• You can apply for advanced clearance from HMRC to check if your company qualifies

Employee requirements

Employees should work either a minimum of 25 hours a week or if they work fewer hours, at 75% of their total working time must be for your company

Shares

The shares offered under the EMI plan must be ordinary shares meeting various requirements. They don’t need to carry voting rights but they must meet other technical conditions.

Specific requirements for the plan

There are rules to meet when drawing up the plan therefore we would recommend getting the plan tailored for your requirements whilst ensuring that none of the rules are breached.

What if a company doesn’t qualify?

If a company does not quality for an EMI – perhaps because it is not a qualifying trade such as a hotel or is too large – then a company share option plan (CSOP) can offer a similar tax efficient alternative. However, CSOPs have a lower limit, allowing up to £60,000 of options at the time of the grant. For companies that don’t meet the criteria for HMRC-approved schemes, such as subsidiaries or those with more complex structures, there are also non-HMRC-approved options like growth shares. While these are not formally approved by HMRC, they are well-established and widely used in practice to align employee incentives with company growth.

Is EMI right for your company?

Whether an EMI scheme is right for your company will depend on your specific goals and structure. Every company is different.

An example of a good fit for an EMI is a start up / high growth company planning for additional investors and eventually an exit. EMI can also be a useful way to help employees start participating in ownership, especially if there’s a long-term plan for them to take on more responsibility or leadership.

However, it may be more complex in family-run businesses, where maintaining control is a priority. That doesn’t mean EMI is not an option, but you’ll need to think about how employees will realise value from their shares. You’ll also need to consider whether your team will be incentivised by what you are offering and how they can eventually benefit. Having a clear end game – like a sale or gradual proceeds via dividends – is key to making the scheme work effectively.

Valuation and limits

Are there limits on the value of the shares that are offered to employees?

Yes there are limits – a maximum of £250k in value of options held per individual and £3m for the company as a whole. It’s important to bear in mind that for EMI we’re calculating the value of the shares under option, not the value of the company as a whole. This means that tax valuations can often apply a large minority discount which may mean people can squeeze more into the £250k individual limit. They could also look to use hurdle shares, a type of shares that only participate over a certain exit value which should have a lower initial value.

For example, a company is valued at £10m and you want to grant options over 5% of the shares. That would be £500k pro-rata, but in reality with a 75% discount that would be £125k. The level of minority discount that’s appropriate will depend heavily on the company’s own circumstances.

It’s worthwhile considering valuation early in the process and the potential impact. You should also consider seeking an HMRC agreed valuation on the grant of your options.

How is the valuation done / how much should employees pay?

The valuation is usually agreed with HMRC before options are granted. For EMI purposes, shares are often valued with a minority discount, since employees typically receive small, non-controlling stakes. This discount can significantly reduce the share price, making it more affordable for employees.

With EMI you can decide the price for the shares. There will usually be extra tax to pay if you grant the option below the price per share valuation agreed with HMRC.

How is the value calculated for the shares on exit?

In an exit scenario, options are exercised at the same time the company is sold. This allows the buyer to purchase the shares directly. Using our earlier example, if the company’s value doubles to £20m and the employee holds options over 5% of the shares, that stake could be £1m. However, the employee must pay the £125k exercise price to the company. They will usually fund this on the sale of the company with the proceeds for their shares. Their gain is expected to be a capital gain, potentially taxable at 18% which could mean they face a capital gains tax bill of £155k.

On the company side, the exercise of options can trigger a corporation tax deduction – in this case, £875,000, which at a 25% tax rate could result in a £220k tax saving.

Incentivisation post exit is a matter for the purchaser. You may wish to pay attention though to the likely outcomes. The classic concern is that all the managers make so much money on a sale, they retire and buy property in the south of France.

Performance

What are the typical performance criteria that you might want to consider when designing a scheme?

Performance conditions are conditions that need to be met in order for the options to be exercise. These types of conditions do not have to be included. An example would be that certain financial metrics have been met such as EBIT targets.

What if the performance criteria aren’t met?

If performance criteria aren’t met, the options may not be exercisable. With most of the plans that we use, there is facility to relax the performance conditions at the discretion of the board so that options can be exercised. This might be helpful in the case of a near miss on financial targets. We recommend this flexibility as there is the potential for events outside of the company’s control to impact performance targets. For example during Covid we saw lots of companies trying to relax performance conditions where these related to financial targets for the whole of the company.

What if employees leave before the shares are exercised?

Usually EMI options lapse when someone leaves, however you can choose to vary that approach.

What about voting rights and control prior to exercising the options?

Employees who hold EMI options do not have voting rights until they actually exercise their options and become shareholders. You can choose whether to use voting or non-voting shares for the option shares. That decision will need to be set out in the documents before granting the options.

Scheme structure and duration

How long can an EMI option scheme last?

Under EMI (Enterprise Management Incentive) rules, there is a maximum duration of 10 years from the date the option is granted. After this period, the option will no longer qualify for EMI tax benefits, although it could continue as an unapproved option.

Many companies use exit options so that if the company is sold the options can be exercised. However it will depend on what you are trying to achieve. If you’re trying to get employees to participate in share ownership without expecting a sale you will likely want them to exercise after a holding period. This can be facilitated in the documents (and you can do an arrangement whereby whichever happens first ie time passing or an exit will permit exercise).

Who should participate?

You can decide who participates. Participate can range from just one individual to everyone, though commonly it’s offered to senior management. There is no requirement to include everyone. However you cannot take options away from people later unless they have breached the conditions of the option or have left the company.

Dividends and communication

What about dividends?

You can decide whether the shares will be dividend bearing or not. Holding options does not entitle an employee to dividends – only holding shares.

How should you communicate the scheme to your employees?

It’s critical to bring your management team along on the journey, ensuring they understand the purpose and value of the scheme. Business owners should clearly share their vision for the future. What is the company aiming to achieve and how can employees benefit from being part of that growth? Setting realistic expectations is key, especially around timelines, potential value, and what needs to happen for employees to realise that value. It’s also helpful to share the financial plan for the business, so employees can see how their efforts contribute to long-term success. On a practical level, we can support you in explaining how the scheme works. This includes the key features, tax benefits, and what it means for each individual.

Conclusion

EMI schemes can be incredibly valuable—but only if they’re set up correctly. We often see issues during transactions, from missing documents to unclear terms, which can delay deals, cause stress, and even reduce what shareholders take home. These problems are usually avoidable with careful planning and well-drafted documents. Given the complexity and the potential tax benefits, it’s worth getting professional advice early.