Employee share ownership continues to be an attractive method to retain and incentivise key employees and successive governments have shown their support for employee share ownership through the statutory schemes on offer. The Enterprise Management Incentive Scheme (EMI) is arguably the jewel in the crown of the statutory plans, and for good reason! The recent Budget put even more wind in EMI’s sails.
Why EMI?
Tax Treatment
EMI offers very generous tax treatment to participants. As long as the exercise price is greater than or equal to the value of shares on the date of grant (more on that later) and the options have retained EMI qualification throughout their existence, no income tax should be due.
It’s on an exit where the tax treatment is particularly generous – any further increase in value of the shares from the exercise price to the sale value should only be subject to CGT and if the shares qualify for Business Asset Disposal Relief, this rate could be as low as 14%, rising to 18% from April 2026. For comparison, current CGT main rate is 24%.
When you compare all that to unapproved options or an exit bonus, EMI is incredibly efficient. Effectively, participants lock in a lower valuation as at the grant date, without having to pay for the shares until they are exercised, where the valuation will hopefully be much higher.
Flexibility
Another highlight of EMI is how flexible it can be. Unlike all-employee schemes like SIP or SAYE, EMI is a discretionary scheme, meaning the company decides which employees will participate and on what terms. Within reason, the company can decide the exercise price, the exercise conditions, and set targets that must be met before the options vest, which can effectively tie an employee’s share incentive to their performance.
Valuation
When thinking about equity incentives, a key consideration is the valuation. Yet again, EMI is a company’s dream, as you can agree the share valuation with HMRC up front, unlike with a direct share issue, where there will always be an element of inconclusiveness.
How did the budget affect EMI?
The changes to EMI announced in the 2025 Autumn Budget have reaffirmed the UK’s status as the gold standard for employee share ownership. Unless stated otherwise, the changes summarised below are to be legislated in the 2025/26 Finance Bill (and “live” from April 2026, we expect):
- The EMI limit on the number of full-time equivalent employees will DOUBLE to 500. Fantastic news for many companies out there, as having a high headcount isn’t necessarily a true indication of a company having matured past the early stages of development and some have previously missed out on offering EMI.
- The EMI gross asset test limit will be QUADRUPLED to £120m. Time after time, we speak to clients who do not qualify for EMI as gross assets are just above £30m, often because of the value of their intellectual property and/or cash on hand following an investment round. This change is long overdue and represents a massive step forward in encouraging more companies to offer EMI incentives.
- The company share option limit for EMI is being DOUBLED to £6m. Another important change for later-stage SMEs, as the limit is measured by the total unrestricted market value of all EMI and CSOP awards, which often increases as a company matures.
- The requirement to file EMI notifications, which is often a sticking point in due diligence exercises, is being REMOVED from April 2027. Although unconfirmed, it is likely that the grant of an EMI option will be reportable on the annual return as with CSOP but watch this space.
- The maximum holding period of an EMI option will increase to 15 years from 10, INCLUDING in respect of existing EMI contracts. This will be great news for any companies that have a well-established EMI plan and were anticipating the need to grant replacement options in the near future.
- Finally, the Chancellor confirmed that existing EMI (as well as CSOP) contracts can be amended to include the transfer of shares on the Private Intermittent Securities and Capital Exchange System (“PISCES”) as an exercisable event. This will be legislated for in Finance Bill 2026-27. The legislation applies to contracts agreed before 6 April 2028, and the changes take effect retrospectively from 15 May 2025.
It is important to note that it is likely that any option which includes a PISCES right to exercise would be treated as a “readily convertible asset”, which will affect the tax treatment of the share on exercise. Therefore, advice should be sought before making a change to an existing option!
Now that we have your attention, what are the next steps?
Our Equity Rewards & Venture Capital Schemes team helps clients with a wide variety of share plan problems; from a new start-up setting up a plan right through to assisting an established company on a due diligence exercise ahead of an exit. We are seeing a lot of demand from companies who have been driven out of EMI by the old limits, who are likely to migrate back. We are now a team of twelve with decades of relevant experience, establishing Cooper Parry as a leader in the equity reward space!
We would urge anyone interested in talking about employee share incentives, or those with existing arrangements, to reach out to the ERVCS team to discuss how we can help you attract, retain and incentivise your employees!
