EMI schemes: Enterprise management incentives
EMI schemes: Enterprise management incentives
In the 2025 Budget, the Government announced positive reforms to Enterprise Management Incentive (EMI) share option schemes, significantly expanding eligibility from April 2026 and reducing administrative complexity from April 2027.
These reforms are expected to make EMI schemes more accessible and attractive to larger companies which have previously quickly outgrown the scheme’s conditions, offering substantial tax advantages and supporting talent retention for UK employees.
EMI options are often the incentive of choice of start ups and scale ups as they are flexible and tax efficient for the employee and for the company.
What is an EMI scheme?
EMI option schemes allow companies to grant options to employees to buy company shares at a future date (e.g. exit or vesting date) at predetermined price. They are designed to help qualifying small to medium-sized companies provide their people stock with significant tax benefits compared to other share arrangements, and help companies with growth potential to recruit and retain employees.
EMI schemes pay out when shares are sold, for example on an exit, secondary sale or a disposal to an unconnected party.
EMI schemes do not entitle to dividends or votes in the company.
Which companies qualify for EMI status?
EMI schemes can be used by independent quoted or unquoted companies with group gross assets of £120m or less from April 2026 (£30m or less before that date).
As well as the asset limit of £120m, companies must carry on a qualifying trade, and there are detailed provisions for this. Examples of trades that do not qualify include leasing, farming, financial activities and property development. The group must also have a qualifying structure.
In a group, EMI share options must be granted over shares in the parent company, and at least one of the trading subsidiaries must carry on a qualifying trade and have UK presence.
A company granting EMI options must not be under the control of another company. Therefore, PE controlled companies often do not qualify for EMI status. However, the parent company of a qualifying group can grant EMI options to group employees. Foreign headquartered companies can grant EMI options to their UK staff, e.g. a US holding company can, in principle, grant EMI options over its stock to UK individuals, provided other conditions are met.
A company or group must have fewer than 500 full-time equivalent employees from April 2026 (fewer than 250 before that date) to grant options under the scheme, and all employees must work at least 25 hours a week, or 75% of their total working time for the group.
Up to £250,000 worth of shares can be granted to each individual in any 3 year period, and the limit on the total value of options that can be granted under an EMI scheme is £6m from April 2026 (£3m before that date).
If there is any doubt about the company’s EMI qualifying status, the company can ask HMRC for a confirmation that the company qualifies via an EMI advance assurance process.
What are the tax advantages of EMI options?
EMI options are very attractive from a tax perspective. Generally, no income tax or national insurance contributions (NIC) liabilities arise on grant or exercise of market value EMI options. Capital gains tax (CGT) at 24% is payable on the gain on the sale of the shares, unless the EMI option has been held for a minimum holding period of at least for 24 months, at which point the option holder should qualify for the Business Asset Disposal Relief (BADR) tax rate at 18% from April 2026 (14% before that date) on the first £1m of gains. Despite the BADR rate increasing, EMI options are still one of the most flexible and tax-efficient ways to retain and incentivise your employees, as the EMI scheme offers a 29% tax saving compared to non-EMI options.
The market value of the shares subject to EMI options can be agreed with HMRC in advance of making grants which makes the scheme certain from the tax perspective.
There are tax advantages to the employer company too. Provided conditions are met, an enhanced corporation tax deduction should be available to the employing company in the period in which the employee realises a gain. There should also be a NIC saving to the employer on option gains.
Qualifying options
Options must be granted to employees or directors over ordinary shares that are fully paid and not redeemable. The shares can, however, be subject to restrictions such as leaver provisions.
EMI-qualifying options can only be given over no more than £250,000 worth of shares per individual. Options can be granted at a discount to market value or nil price, although there are tax consequences at the date of exercise if EMI options are granted at a discount to the market value of the shares. Options must be capable of being exercised within 15 years from April 2026 (10 years before that date).
EMI options must be documented in HMRC-compliant way.
Who can be granted EMI options?
EMI options can only be granted to employees who are required to work for at least 25 hours a week, or, if less, at least 75% of their working time must be for the company or group.
Employees who have a ‘material interest’ of more than 30% of the share capital before the options are granted are excluded from participation. EMI options cannot be granted to self-employed individuals or those employed by employer of record.
Employees holding EMI options who are internationally mobile or are sent on a secondment overseas may lose some of their tax advantages as the EMI status of the options is not honoured internationally.
Potential pitfalls of EMI schemes
EMI schemes provide generous tax and NIC reliefs for qualifying options. However, there are a number of disqualifying events that limit these reliefs. Disqualifying events include:
- The company coming under the control of another company
- The company ceasing to meet the trading activities test
- The employee ceasing to be an eligible employee, e.g. termination of employment or the employee ceasing to meet the working time requirement
- A significant variation in the terms of the option (see below)
- A non-commercial alteration to the share capital of the company that increases the value of shares under option.
If the option is exercised within 90 days of a disqualifying event, full income tax and NIC benefits are maintained. If the option is exercised more than 90 days after a disqualifying event, then relief is only given up to the date of the disqualifying event. It is essential that companies and option holders keep their EMI arrangements under regular review. On a sale or takeover, it is possible to have an exchange of options that protects the tax reliefs. This should be provided for in EMI option agreements.
An EMI disqualifying event can create unexpected PAYE and NICs liabilities for the employer company.
What happens if the EMI option ceases to qualify?
If the company or individual does not meet the qualifying criteria throughout the whole life of the EMI option, income tax (and potentially NICs) is payable on the gain during the non-qualifying period.
Varying an EMI option after grant
Many EMI scheme rules contain discretionary powers that allow the board to determine “when” and “to what extent” subsisting EMI options will be exercisable. These powers can generally be used to amend:
- when an EMI option can be exercised (or the event that triggers exercise)
- the vesting dates
- the performance conditions; and
- the good/bad leaver provisions.
The powers provide useful flexibility to “reset” and “flex” granted EMI options to make sure they adapt to changing company performance and the wider business environment, for example, by resetting performance conditions as commercial circumstances change.
Changing the terms of EMI options after grant is risky as it may jeopardise the EMI status of options granted. HMRC has published guidance on the principles they will apply when assessing whether the exercise of a discretionary power by the board triggers a change to the EMI status of subsisting EMI options when they are exercised.
The guidance sets out the following key principles on the use of discretionary powers:
- The exercise of discretion to accelerate vesting or to vary or waive a performance-related condition is generally acceptable, provided the exercise date is not brought forward.
- Varying or waiving of performance-related vesting conditions applying to EMI options will generally be acceptable.
- Where the board has complete discretion under the scheme rules to choose the circumstances or timing under which an EMI option may be exercised, the exercise of this power will be regarded by HMRC as a lapse and regrant of a new EMI option.
- HMRC has confirmed that it is not acceptable to amend the EMI option rules or use discretion to create a new right of exercise, introduce a discretion clause where none existed before or to change “when” the EMI option can be exercised, unless the amendment does not involve an improvement to the rights of the option holder that is more than de minimis.
HMRC’s approach to discretion has highlighted an important distinction between; (a) changes to vesting rights or performance conditions that may increase the number of shares that can be acquired on the exercise of the EMI option, but does not accelerate the point from which the EMI option can be exercised (which will not impact on the EMI tax treatment); and (b) changes to vesting rights or performance conditions that mean that the EMI option can be exercised at an earlier point than it otherwise would have been, or gives a new right of exercise (which will have a negative impact on the EMI tax treatment).
The main practical impact of the guidance is that employers can expect to be challenged by HMRC on the tax treatment of their EMI arrangement if the vesting terms of an EMI option is amended to bring forward the date on which the EMI option can be exercised.
EMI notification to HMRC and EMI annual reporting
All EMI schemes must be registered with HMRC.
EMI options must be reported electronically to HMRC following the grant. Failure to notify HMRC of EMI option grant will result in the option losing its EMI status. However, the EMI notification requirement will be removed from April 2027, reducing compliance risk and administrative burden.
You must notify HMRC of the grant of an EMI option on or before 6 July following the end of the tax year in which the grant was made. For example, EMI options granted during the 2025/26 tax year will need to be notified to HMRC by 6 July 2026.
Although the above date aligns to the annual reporting obligation, the notification of EMI options is still a separate process from the annual return, so we would recommend that companies continue to notify the grant of EMI options to HMRC as soon as possible to ensure that this reporting is not overlooked.
The consequences of failing to notify an EMI option mean that it would fail to subsist as a ‘qualifying’ EMI option and lose the tax-favoured treatment, which could be a substantial loss of benefit.
EMI options are subject to EMI annual reporting to HMRC whether or not new EMI options were granted in the year or not.
Setting up a new EMI scheme
If you would like to explore creating an EMI scheme for your business, you can get in touch with our expert team, who will be happy to help.
Expert advice on EMI options
EMI options remain one of the most flexible and tax-efficient ways of retaining and incentivising your employees.
If you have any questions about your existing EMI options, or any other share plans for your business, please get in touch – our team of specialists will be happy to help you.