EMI Share Schemes Explained: How to Recruit and Retain Employees Tax-Efficiently

When running a start-up or scale-up, recruiting and retaining the right people is critical to your company’s growth and long-term success. But attracting top talent is competitive to say the least — and while it’s often costly and time-consuming, it’s not something you can afford to get wrong. The pressure point for many founders is cash. Even if you’re bootstrapped, matching market-leading salaries and bonuses isn’t always practical or realistic at this stage of the business. That’s where an Enterprise Management Incentive (EMI) share scheme can offer a powerful alternative solution. In this guide, our team explains how EMI share option schemes work, why they can benefit both the company and the employee, and who they’re suitable for — helping you decide whether an EMI scheme could be used to your advantage.

What are EMI share schemes?

EMI schemes are just one type of HMRC-approved employee share option arrangements designed specifically to aid entrepreneurial and high-growth companies achieve success. It does this by giving them a unique position of being able to offer employees the option to purchase shares in the company in a significantly tax-favourable manner. Doing so helps companies attract in-demand talent and recruit for critical roles that are integral to the company achieving its targets and goals. EMI schemes can retain and motivate key employees because when employees own a stake in the company they work for, they become much more naturally aligned to working towards the same goal. They are therefore an effective tool for founders in both recruiting staff as well as retaining them.

Whilst what makes them particularly attractive is the tax-advantageous treatment of acquiring the shares as well as the favourable capital gains tax (CGT) treatment on share disposal, this does rely on strict eligibility criteria and ongoing compliance. We’ll go over all of this in the below sections to make sure you get your EMI share scheme set up correctly. 

How do they help attract and retain key employees?

To understand how EMI share schemes work and how they help recruit and incentivise employees, we need to first explain the fundamentals – namely, the share option agreement. Rather than issuing shares to a new employee outright, a share option agreement means that when granted, it allows the employee the option to buy shares at a fixed price at a future date. It’s aptly referred to as an “option” because whilst offering such an arrangement is done through a legally binding agreement, it gives the employee a right to acquire shares in the company as opposed to a mandatory obligation to do so.

There are two particular features of EMI option schemes which makes it particularly effective: the exercise price and the timing of exercise. The exercise price is normally fixed at the market value of the shares at the time the option is granted. In standard circumstances this will be when the company is still in its early stages of growth or just about to prepare for expansion. The value is therefore typically lower than at the future date of when shares will be available to purchase because the expectation is that by then it would have increased in value.

The exercise timing is when an employee is allowed to exercise their share option and buy the shares. This is often linked to a vesting schedule which can stagger acquisition upon certain conditions such as having been with the company a certain number of years, performance milestones, or at the company’s eventual exit. If at the point in time an employee becomes eligible to exercise their share option, but the company’s value has not increased or even decreased, they are not mandated to purchase and so therefore makes an EMI share option arrangement inherently low risk for employees.

These two aspects of a share option agreement therefore not only motivate employees to strive towards shared company goals but also incentivises and encourages loyalty to the company improving staff retention rates.

Examples showing how an EMI scheme works

Gemma joins Company A and is offered the chance to buy shares through an unapproved employee share option scheme (unapproved simply means not tax-efficient). She’s entitled to acquire 2% shareholdings for the market value price of £8,000. Once Gemma’s vesting schedule allows, she decides to exercise her option and buys the shares which have since increased in market value to £15,000.

At the time Gemma was granted the share option, there was no tax liability. However, as soon as she exercises the option and purchases the shares, she faces an immediate income tax charge and National Insurance payments on the difference between the current share value (£15,000) and the price she’s able to pay for them as per the agreement (£8,000).

For the purpose of this example, Gemma is a higher rate taxpayer and is therefore required to pay 40% tax on the difference. Her income tax bill on this transaction is therefore £2,800.

Later down the line, Gemma decides to sell her shares at which point they become worth £20,000. This means she makes a capital gain of £12,000 and will be liable to pay capital gains tax (CGT) at a rate of 24%. Her CGT bill comes to £2,880. The total tax she’ll have paid is £5,680 which means overall she makes £6,320.

In comparison, Laura joins Company B which also offers her an employee share option arrangement but through an EMI scheme. Using the same figures as above will allow us to illustrate just how tax-advantageous they are over unapproved schemes.

So, Laura is offered her 2% shareholding for the same market value of £8,000. By the time she’s able to exercise her share option they increase in value to £15,000 which she decides to purchase. Unlike Gemma above however, this time, no income tax or national insurance to be paid.

At a future date, Laura disposes of her shares when they have grown in market value to £20,000. At this point, Laura does become exposed to a capital gains tax liability which would ordinarily be charged at 24%. However, another reason why EMI shares are tax-efficient is because the employee may be able to utilise Business Assets Disposal Relief (BADR) to reduce their CGT rate to 18%. Laura therefore only pays £2,160 in tax. Her total gain made from her shares is £9,840 making her £3,520 more than Gemma.

How does my company qualify for EMI?

Only limited companies can use EMI share schemes as you must have the ability to issue shares in the company to your employees, so this automatically excludes those businesses operating as sole traders or partnerships. EMI share schemes are specifically designed for small to medium sized start-ups and scale-ups but since the 2025 Autumn budget, the eligibility criteria have been extended so that more companies can utilise the scheme.

Currently, and up until April 2026, companies must:

• Have no more than 250 employees
• Not have gross assets of over £30 million
• Not be controlled by another company (i.e. it cannot be a 51% subsidiary of a parent company)
• Be carrying out a qualifying trade (excluded business activities can include banking, farming, property development, provision of legal services and ship building. A full list of excluded activities can be found here)
• Not offer more than £3 million in share options at any time (with the value of the shares based on market value at the time of grant)
• Have a permanent establishment in the UK

From April 2026 onwards, the changes extend these limits to:

• Companies must not have more than 500 employees
• Companies cannot have assets of more than £120 million
• Companies cannot offer more than £6 million in share options

How does an employee qualify for an EMI option?

One of the many benefits of choosing an EMI share scheme over other employee share schemes is that founders retain full control over which employees will qualify as well as when they’re able to exercise their share option if granted. This means that there is no overarching rule which dictates EMI share options must be offered to all employees which is unlike some other schemes. You are therefore free to exclusively offer EMI share options to those in senior positions, those who reach their performance targets, or those with skills that were particularly competitive to recruit for.

Not only that but using an EMI scheme allows you to design your own vesting schedule which means you stay in control of when employees are eligible to exercise their option. This can be only when they meet certain performance targets, stay with the company a certain number of years, when the company reaches their next funding round, or even only when the company is bought out. 

Nevertheless, HMRC does have some guidelines which stipulates that in order for employees to qualify for the tax advantages, they must:

• Be a UK tax resident
• Not have more than 30% equity in the company (which includes themselves as an individual but also their associates which are classed as parents, children, spouses or trustees)
• Work at least 25 hours a week, or if less, 75% of their total working time
• Not have share options of more than £250,000 at the time of grant
• Hold the shares for at least 2 years before selling if they want to utilise BADR for the lower CGT rate

What happens if an employee leaves?

This is naturally an important aspect to understand before deciding whether to offer EMI options to employees. While founders and directors have considerable control over how EMI schemes are structured, the outcome when someone leaves the business will largely depend on whether the individual holds unexercised share options or shares that have already been acquired by exercising those options.

Where an employee leaves while still holding an unexercised option, most EMI schemes differentiate between what is commonly referred to as a “good leaver” and a “bad leaver”. A good leaver is typically someone who has contributed positively to the business but needs to leave due to circumstances such as ill health, retirement, or other personal reasons. In these situations, companies can choose to allow the individual to retain the right to exercise their option after departure. By contrast, a bad leaver is usually someone who leaves following poor performance, a breach of their employment contract, or before meeting the vesting conditions attached to the option. In these circumstances it is common for the option to lapse or for the right to exercise it to be withdrawn, although this must be clearly set out within the scheme documentation when the EMI arrangement is first established.

Where a good leaver remains entitled to exercise their option, timing becomes particularly important. Under rules set by HMRC, employees normally have 90 days from the date they leave employment to exercise their EMI share option if they wish to retain the scheme’s favourable tax treatment. If the option is exercised outside of this period, it will generally lose its tax-advantaged status and instead be treated as an unapproved share option, which can result in income tax and National Insurance becoming payable on exercise. Of course, a departing employee may decide not to exercise their option at all, in which case it simply lapses and there are no tax consequences for either the employee or the company.

The position is different where an employee has already exercised their option before leaving and therefore holds shares in the company. At that stage the rules of the EMI scheme itself no longer determine what happens next. Instead, the outcome will depend on the company’s articles of association and any shareholder agreements in place, as these documents govern how shares may be transferred, sold or bought back. For this reason, it is important that founders review their constitutional documents carefully to ensure they support the intended operation of the scheme and wider business objectives. In practice, good leavers may be given the opportunity to sell their shares back to the company at market value or allowed to retain their holding, whereas bad leavers are often required to sell their shares back at a discounted or nominal value, sometimes as little as £1 per share. As this illustrates, the treatment of leavers should be carefully considered when designing an EMI scheme so that a range of possible scenarios are properly addressed from the outset.

What are the tax benefits of EMI schemes for my company?

Not only can they help you incentivise and retain staff, but additional benefits of an EMI scheme include tax relief for your company.  One of the most significant tax advantages is the potential corporation tax deduction. When an employee exercises their EMI share option, the company can claim a corporation tax deduction based on the difference between the market value of the shares at the time the option is exercised and the price the employee pays for those shares. This deduction can be available even if the option was granted at a discount or if the share value has increased substantially since the option was originally granted. For growing businesses where share value may increase over time, this can result in a substantial reduction in the company’s corporation tax liability.

Another benefit is the ability to reward employees through equity rather than cash remuneration. Salaries, bonuses and other cash incentives typically trigger employer National Insurance contributions and create an immediate cash flow strain for the company. By contrast, EMI share options allow companies to offer meaningful long-term incentives without incurring those same upfront payroll tax costs. In many cases, if the option is granted at market value and the scheme qualifies for EMI treatment, no employer National Insurance contributions arise when the option is exercised.

EMI schemes can therefore provide a tax-efficient alternative to traditional remuneration strategies. Instead of increasing salary or paying large bonuses to attract and retain key individuals, founders can use share options to align employees with the long-term growth of the business while managing short-term cash requirements. This can be particularly valuable for start-ups and scale-ups that are reinvesting capital into growth rather than distributing profits.

There can also be additional strategic advantages when preparing for a future investment round or company sale. Employee engagement through EMI schemes can demonstrate to investors that key staff are financially aligned with the success of the business.

As with most tax-advantaged share schemes, these benefits depend on the scheme being implemented correctly and maintaining compliance with the relevant rules throughout its lifetime. Careful planning is therefore essential to ensure the EMI scheme delivers the intended tax outcomes for both the company and participating employees.

Ready to set up an EMI scheme?

The Autumn Budget will soon extend EMI schemes to even more companies, so if you’re looking to scale-up, there could be little holding you back from setting up your own EMI share options scheme to help grow your business and your team. Of course, securing favourable tax treatment offered by HMRC, the scheme must be structured correctly and meet strict eligibility and compliance requirements which is where our team are on hand to support you. Get in touch using our online contact form today to get started.