Cashflow-friendly employee incentives – the EMI scheme

Both businesses and employees are facing pressure on their finances arising from the recent tax hikes and the high levels of inflation that we are all experiencing. Now is therefore a good time to consider employee incentives that have minimal upfront cash outflow whilst providing potentially significant long-term rewards. This will help motivate and retain key members of your workforce.

For companies these can take the form of share incentives where an employee is provided with either shares, or ‘options’ to acquire shares at a future date, normally on the occurrence of certain events or performance targets being achieved.

A particular tax efficient way to provide share incentives is to issue options under the Enterprise Management Incentive (EMI) scheme.  Don’t fear the word scheme as this is a government created arrangement that HMRC will provide confirmation of a company’s qualifying status, if requested (note however that not all trades qualify).

Under the EMI scheme, share options are provided to employees giving them the right to acquire shares at a future date and at a predetermined price.  The following key benefits arise from using this scheme:

  • Future growth in value of the shares is normally taxed on the employee only at the lower capital gains tax rates rather than income tax and possibly national insurance.
  • Business Asset Disposal Relief (10% tax rate) normally applies to the shares acquired through the EMI scheme when they are sold.
  • The company can be selective about who receives the options.
  • The criteria to exercise (when the employees can buy the shares) can be very flexible, including only being on a full company sale.
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