EMI share options: giving staff a stake without giving away control

Sooner or later a small company reaches the point where somebody genuinely important cannot be paid what they are worth in cash. They are doing work that changes the value of the business, they know it, and a 4% pay rise is not the conversation either of you wants to have. The obvious answer is to give them a stake — and the obvious answer is usually implemented badly, by handing over actual shares in a moment of enthusiasm.

Shares carry votes, dividend rights, information rights and, most awkwardly, permanence. Options do not. An Enterprise Management Incentive scheme — EMI — is the UK's purpose-built mechanism for giving employees the upside without the complications, and its tax treatment is the most generous available.

What an option actually is

An option is a right to buy a fixed number of shares at a fixed price at some point in the future. The employee is not a shareholder today. They do not vote, they do not receive dividends, they do not appear on the register at Companies House, and if they leave before the option can be exercised, in most schemes it simply lapses.

That distinction does most of the work. The person gets a genuine, contractual claim on the growth in value they are helping to create. You keep control of the company you are still running.

In practice most small companies grant exit-only options, exercisable only on a sale of the business. Nobody ever has to find the cash to buy shares in a company that has not sold, no minority shareholder ever appears on the register, and the incentive points at exactly the event the owner cares about.

Which companies qualify, and what changed in April 2026

EMI has always been aimed at smaller, independent trading companies, and the qualifying limits were substantially widened for options granted from 6 April 2026.

The gross assets limit rose from £30 million to £120 million. The employee headcount limit rose from 250 to 500 full-time equivalents. The total value of unexercised EMI options a company can have outstanding rose from £3 million to £6 million. The maximum an individual employee can hold remains £250,000 of shares measured at the grant date, and the option exercise window was extended from 10 years to 15 years from grant.

For a typical UK small business none of the ceilings will ever bind. The conditions that do bite are these: the employee must work at least 25 hours a week for the company or, if fewer, at least 75% of their total working time; the company must be independent, not controlled by another company; and certain trades are excluded, including banking and financial activities, legal and accountancy services, property development and farming.

An option gives someone the upside of ownership without the rights of ownership. That is not a trick played on the employee — it is the only version of the deal most owners would ever actually sign.

The tax treatment, with numbers

This is why EMI exists rather than any of the alternatives. Where options are granted with an exercise price at least equal to the market value of the shares at grant, there is no income tax and no National Insurance on grant or on exercise. Tax arrives only when the shares are sold, and it arrives as capital gains tax.

Better still, EMI shares can qualify for Business Asset Disposal Relief without the usual requirement to hold 5% of the company, provided the option was granted at least 24 months before the disposal. BADR is charged at 18% from 6 April 2026 on the first £1 million of qualifying gains.

Take an illustrative case. An employee holds options over 50,000 shares at an exercise price of £1, agreed with HMRC as market value at grant. Three years later the company sells at £4 a share. They exercise for £50,000 and immediately sell for £200,000, a gain of £150,000. With BADR at 18%, the tax is £27,000 and they keep £123,000.

Run the same reward through an unapproved option scheme instead. The £150,000 gain is taxed as employment income on exercise: at 40% income tax that is £60,000, plus employee National Insurance, and the employer faces a further Class 1 National Insurance charge of around £22,500 at 15% — a cost frequently passed to the employee by agreement. Same shares, same growth, roughly half the outcome. Meanwhile the company still gets a corporation tax deduction for the gain delivered to the employee.

The mechanics you must not skip

Three administrative steps decide whether the tax treatment survives.

First, the valuation. Agree the market value of the shares with HMRC before granting, so nobody argues later about whether the exercise price was set below value. HMRC will give advance agreement on a share valuation for EMI purposes.

Second, the notification. A grant must be notified to HMRC to qualify, and for options granted on or after 6 April 2024 the deadline is 6 July following the end of the tax year of grant. Miss it and the tax advantages can be lost outright — an entirely avoidable, entirely irreversible mistake.

Third, the annual return. Once a scheme is registered, an employment-related securities return is due every year by 6 July, whether or not anything happened. Penalties apply for late or inaccurate returns.

The commercial questions that matter more than the tax

Before any of it, settle four things in writing and preferably in the same document as your shareholders' agreement.

How much of the company are you giving away? An option pool of 5% to 10% is common in growing companies, and it dilutes existing shareholders — including you — when exercised. Model the dilution at the exit value you are aiming for, not the value today.

What has to happen before the options vest? Time-based vesting over three or four years is the norm, sometimes with performance conditions. Vesting is where a scheme either drives behaviour or fails to.

What happens when somebody leaves? Good leaver and bad leaver provisions decide whether vested options survive resignation, dismissal or ill health. This is the clause that causes every subsequent argument, so write it while everyone still likes each other.

And what have you actually promised? A scheme that nobody understands motivates nobody. If the recipient cannot explain in a sentence what they own, when it pays out and what would take it away, the scheme is costing you equity and buying you nothing — which is the same failure mode as a pay rise conversation handled badly, just with a longer fuse.

One last point of realism: EMI pays out on an exit. If you have no intention of ever selling, options are a promise of an event you do not plan to cause, and a profit share or bonus scheme is the honest instrument instead. If you are building towards a sale, and you have investors involved, EMI sits alongside the rest of your equity story — including the EIS and SEIS questions investors will ask — and is worth setting up properly the first time.

Common questions

What is the difference between a share and a share option?

A share is ownership now: votes, dividends, information rights, a place on the register at Companies House, and permanence. An option is a contractual right to buy a set number of shares at a set price at a future point, usually subject to vesting conditions and often exercisable only if the company is sold. Until exercise the holder is not a shareholder and has none of those rights. For most small companies that difference is the whole point, because it delivers the financial upside to a key employee without creating a minority shareholder who has to be consulted, bought out or argued with later.

Which companies qualify for EMI share options in 2026?

For options granted from 6 April 2026, the company must have gross assets of no more than £120 million (up from £30 million) and fewer than 500 full-time equivalent employees (up from 250), and can have no more than £6 million of unexercised EMI options outstanding (up from £3 million). It must be independent and carrying on a qualifying trade — banking and financial activities, legal and accountancy services, property development and farming are among the excluded trades. Employees must work at least 25 hours a week, or 75% of their working time, for the company. Each individual can hold up to £250,000 of options measured at grant.

How are EMI share options taxed?

If the exercise price is at least the market value of the shares at grant, there is no income tax or National Insurance on either grant or exercise. Tax arises only on sale, as capital gains tax on the growth in value. EMI shares can qualify for Business Asset Disposal Relief without meeting the usual 5% shareholding test, provided the option was granted at least 24 months before disposal, giving an 18% rate from 6 April 2026 on the first £1 million of qualifying gains. The company also receives a corporation tax deduction for the gain delivered to the employee.

What happens to share options when an employee leaves?

Whatever your option agreement says — which is why the leaver provisions matter more than almost any other clause. Most small-company schemes provide that unvested options lapse immediately on leaving, and that vested options either lapse too or must be exercised within a short window, with different treatment for good leavers such as those leaving through ill health or redundancy and bad leavers such as those dismissed for misconduct. Draft it at the point of grant, explain it clearly to the recipient, and be aware that leaving events also carry HMRC reporting consequences under the annual employment-related securities return.