Advantages of an EMI option scheme
Setting up an EMI share option scheme is a very tax-efficient way to attract and retain talented employees; and is particularly well-suited to rapidly growing, technology-led businesses. It offers valuable and potentially very lucrative incentives to employees to stay with the company for the longer term, plus tax benefits for the company. In particular, if you are planning a stock market listing or anticipate the possibility of being bought out by a larger firm, you can set your option scheme to only vest upon an exit, incentivising employees to work towards the same goal and to stay with the business until that goal is achieved.
Advantages for staff
Employees do not pay income tax or NICs when they accept the initial grant of share options.
When they exercise their options they only face an income tax liability if price they pay is lower than the market value that was agreed with HMRC when the options were granted. This is unusual: generally we would advise our clients to ensure that employees pay the agreed market value upon exercise. But if the exercise price is lower than the market value at the time of grant, income tax will be payable and national insurance is payable if the shares are classified as readily convertible assets (ie. if the employee could sell them for cash).
If employees sell shares acquired when exercising their options to a third party they will have to pay capital gains tax. However, if the employee was granted the option at least 12 months (or 24 months, for options granted from April 2019 onwards) before the sale date, capital gains will be charged at a discounted rate of 10%, instead of the usual 20%, because the employee will be eligible for Entrepreneurs Relief.
Advantages for the company
The primary benefit for the business is that the scheme offers a useful, tax-efficient way to attract and retain talented people during a growth phase when financial pressures are likely to restrict the size of salaries or bonuses.
In addition, costs incurred when setting up and managing EMI schemes are fully tax-deductible; and companies receive corporate tax relief when employees exercise their options by purchasing shares. In our experience, many accountants overlook this important tax deduction available to the company; Barnes & Scott has the expertise needed to calculate this deduction accurately, in order to ensure the company receives the maximum benefit to which it is entitled.