EMI share options: the scheme that lets you hire people you can't afford
What EMI is, why it is the most generous option scheme in the world, who qualifies, how to set one up, what to grant and at what price, and the mistakes that cost the tax relief.
You cannot pay the head of sales what a bigger company would. What you can do is give them a real share of what they help build, taxed at 10% instead of 45%, with no tax at grant and the company getting a corporation tax deduction when they cash in. That is the Enterprise Management Incentive scheme, and there is nothing like it anywhere else. Every seed company that intends to hire should set one up.
What EMI gives
- For the employee: options over shares at today's price, usually vesting over four years. No income tax or NI at grant or (if the exercise price is the market value at grant) at exercise. When they sell, capital gains tax at 10% under Business Asset Disposal Relief on the first £1m of lifetime gains, provided the options were held two years. An option granted today over shares worth £1 that are sold for £20 in five years: £19 of gain taxed at 10%.
- For the company: a corporation tax deduction equal to the gain on exercise, a hiring tool that costs no cash, and a retention mechanism that works.
Who qualifies
- Company: independent trading company, gross assets under £30m, fewer than 250 employees, a qualifying trade (most are; similar exclusions to EIS).
- Employee: works at least 25 hours a week or 75% of their working time for the company; holds under 30%.
- Limits: £250,000 of options per employee (valued at grant), £3m across the company.
Setting it up
- Agree a valuation with HMRC. You propose a value for the shares (often a discount to the last round price for minority, non-voting, restricted shares — 30–70% discounts are normal) and HMRC agrees it, usually within a few weeks. The agreed value is the exercise price that makes exercise tax-free.
- Adopt the plan. Board and shareholder approval; articles permitting the share class; an option pool sized to the next eighteen months of hiring.
- Grant. An option agreement per employee: number of options, exercise price, vesting schedule, leaver terms, exercise on exit.
- Notify HMRC. Since April 2024, by 6 July following the end of the tax year of grant. Miss it and the options are not EMI.
- Annual return. Every year by 6 July, even if nothing happened.
What to grant
Rough benchmarks for a seed company: a first senior hire (head of sales, CTO coming in) 1–3%; early engineers and managers 0.25–1%; later hires 0.05–0.25%. A pool of 10% covers the first fifteen or so hires. Exercise on exit only (options can only be exercised when the company is sold) is common at seed and keeps the cap table simple; it costs nothing for the employee until there is money.
Mistakes that cost the relief
- Granting before the HMRC valuation is agreed — the exercise price may be below market value and the gain taxed as income.
- Missing the notification deadline.
- Granting to someone who works fewer than the required hours.
- Promising options in offer letters and never granting them — the promise is enforceable, the tax treatment is not.
- Letting the company cease to qualify (a disqualifying event like a takeover or ceasing to trade) without exercising within 90 days.
Questions founders ask
"How much does it cost to set up?"
£2–5k with a specialist for the valuation, plan and first grants; less with a platform that automates it. The corporation tax deduction on the first exercise usually repays it many times.
"Should founders have EMI options?"
Founders hold shares, not options, and usually exceed the 30% limit anyway. A founder who joins later with a small stake might.
"Do investors mind the option pool?"
They expect one; they mind an oversized one created pre-money. Size it to the hiring plan — see cap tables.