How to recruit and retain your best talent with an EMI scheme

In this article we discuss the recruitment, retention and tax benefits of share incentive schemes, and in particular Enterprise Management Incentive (EMI) schemes, designed for small and medium sized enterprises (SME’s).

Staffing challenges facing employers

• A fierce competition for talent – With fewer candidates, record job vacancies and the ability to work from virtually anywhere – businesses are facing a highly competitive and challenging recruitment market.
• Rising costs of employment – A 1.25 % rise in employers’ National Insurance contributions (NICs), a 6.6% increase to the national living wage and inflationary pressures, businesses are facing increasing salary costs. This is on top of other business cash flow pressures, not least rising energy, fuel costs and the repayments of deferred tax bills and Government backed loans following the COVID-19 pandemic.

Attract, motivate and retain staff cost effectively

In light of the above challenges, many businesses are now turning to employee share incentives as an effective solution to support their staff recruitment, incentivisation and retention without the costs associated with additional salary increases.

There are a number of share incentive arrangements available to suit most businesses – some involve options; whilst others involve employees directly holding shares, or bonuses linked to share performance.

EMI Schemes are one of the most popular types of share incentive, designed by the Government to provide tax-effective share awards for SMEs offering tax benefits to both the employee and employer.

How does an EMI scheme work?

Selected employee/s are awarded an option to acquire shares at a set price in the company at a future date. They do not need to be made available to all employees, they are usually limited to key employees, such as management, fee earners or highly technical/specialist employees.

When agreed targets are met, the option can be exercised, the original agreed price paid and shares acquired. Often this is when the company is sold so the options are exercised immediately prior to the sale, the employee acquires the shares, then receives their share of the cash proceeds, less the grant price.

Without the EMI share schemes, the market value of the shares on exercise are likely to be taxed as earnings resulting in the gain being liable to income tax and potentially NICs. If NICs are due the employing company also has a liability. None of these employment taxes should become due with an approved EMI scheme.

Who is eligible to offer an EMI scheme to employees?

Your company must satisfy certain criteria to offer an EMI scheme to your employees, which include:

• Your company must not be controlled by another company i.e more than 50% of its ordinary share capital must not be owned or controlled by another company or persons connected with it.
• For groups, all subsidiaries must be qualifying subsidiaries.
• You must not be carrying out one or more excluded trades (these can be found on the GOV.UK website here).
• The gross assets of your company (or group) must not exceed £30 million at the date the EMI option is granted.
• You must have fewer than 250 full-time equivalent employees at the date on which a qualifying EMI option is granted (appliable for options granted after 21 July 2008).
• You must have a permanent establishment in the UK.

With regards to the requirements of the EMI scheme itself:

• Employees working hours must be more than 25 hours per week for your company or another subsidiary within the group, or at least 75% of their total working time as an employee within the group.
• Any employees who already have more than 30% of the ordinary share capital cannot be granted options.
• The options must be capable of being exercised within ten years of the date of the grant.
• No employee may hold unexercised qualifying EMI options with a market value of more than £250,000. The market value is taken at the date of grant.

What is the latest on EMI schemes?

In the 2022 Spring Statement the Government concluded its review and that there will be no change to the current EMI scheme (in place substantially in the same form since 2000).

However, it will review the other discretionary tax-advantaged share scheme, the Company Share Option Plan (CSOP), and whether this should be reformed to support companies as they grow beyond the scope of EMI, allowing more companies to access the scheme in future.

Our final thoughts on EMI schemes

EMI share schemes are a great way to offer employees ownership in your business tax efficiently and enhance retention and motivation. Therefore, putting in place share options is a cheaper alternative to raising salaries or paying bonuses.

Provided that you qualify, EMI also offers flexibility, for example in limiting voting rights, providing pre-emption and the ability to set conditions of the EMI share option. There is much to consider so it is advisable to choose a professional advisor to assist you through the process.