What is EMI scheme and how does it affect startups?

Full Explanation

The Enterprise Management Incentive (EMI) scheme allows UK private companies to grant tax-advantaged stock options to employees, with no upfront income tax and capital gains treatment on exit.

The UK EMI scheme is designed to help smaller, growing companies recruit and retain people through share options. The company must be independent (not controlled by another company) and carry on a qualifying trade, and for options granted from 6 April 2026 it must have gross assets of £120m or less and fewer than 500 full-time equivalent employees (previously £30m and 250). Each employee can hold EMI options over shares worth up to £250,000 at grant, and must work for the company at least 25 hours a week, or 75% of their working time. Tax benefits include: (1) no income tax or National Insurance on grant, (2) none on exercise if the exercise price is at least the market value at grant, and (3) the gain on sale is a capital gain, taxed at up to 24%, or at 18% with Business Asset Disposal Relief from 6 April 2026 where the option was granted at least two years before the sale. That compares with income tax of up to 45% on the gain from unapproved options at exercise, plus National Insurance where the shares are readily convertible assets. EMI is discretionary: the company chooses who receives options. There is no advance approval from HMRC, but the company must register the scheme, notify each grant by 6 July after the end of the tax year of grant (for options granted from 6 April 2024; for grants from 6 April 2027 the government plans to replace this with reporting in the annual return) and file annual returns, and it can ask HMRC to agree the share value before granting. UK rules as at October 2026; take advice on your own facts. Many investors expect an EMI plan to be in place before they invest because it shows retention discipline. Once a company is controlled by another company, as after a sale to a trade buyer or to most private equity funds, it can no longer grant new EMI options; our management incentive plan guide explains what usually replaces them.

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