Enterprise Management Incentive (EMI)

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The Enterprise Management Incentive (EMI) scheme is a government-backed, tax-advantaged share options program that is primarily utilized by small to mid-sized businesses.
What are the main aims and objectives?

The primary aims and objectives of the Enterprise Management Incentive (EMI) scheme in the UK include attracting and retaining talent within small and growing businesses, aligning employee interests with the company, and rewarding employees for business growth. Another objective of the EMI scheme is to provide tax relief for qualifying businesses. The scheme allows businesses to grant share options to employees in a tax-efficient manner, providing benefits such as no employer's National Insurance Contributions and potentially lower tax costs for employees. Lastly, the EMI scheme aims to facilitate wealth creation for employees. As the share value increases, employees can sell their shares at a profit, thereby building personal wealth in a tax-advantaged way

How does the program work?

The EMI scheme is a government-backed tax advantageous share options scheme which allows companies to reward employees with equity in a highly tax efficient way. Eligible companies are able to grant share options up to the value of £250,000 in a 3-year period. The recipient will not have to pay Income Tax or National Insurance if they buy these shares for at least the market value they had when the option was granted. Capital Gains Tax (CGT) is applied at a lower rate of 10% versus the standard 20% provided that the shares are not sold within 24 months of the option grant. Crucially, tax is incurred only on the value of the shares at the time of their award rather than at the time of exercise (at which their value may have risen).

To qualify for the scheme, companies must meet the follow criteria:

  • Has less than 250 employees
  • Has assets of less than £30 million
  • Is not majority owned or controlled by another company
  • Is not in one of the excluded industries, including banking, farming, property development, provision of legal services, shipbuilding, or leasing.

Additionally, individual employees must meet the following eligibility requirements:

  • They must spend at least 25 hours per week or 75% of their total working time as a company employee.
  • They may not hold more than 30% of the company's shares.
What is the overall cost?

EMI costs £400 million per year in lost revenue through income tax and national insurance contributions.

How was it implemented?

The Enterprise Management Incentive (EMI) scheme in the UK was established in the year 2000 as part of the Finance Act and is administered by Her Majesty’s Revenue and Customs (HMRC) which is a non-ministerial department of the UK Government responsible for the collection of taxes.

Since its inception, there have been some significant changes to the EMI Code. The UK government aimed to simplify the qualifying criteria and administration for EMI share schemes. This included the removal of detailed restrictions and the working time declaration requirement.

EMI is one of four main tax-advantaged employee share schemes available in the UK. Compared to other share option schemes available to UK-based businesses, EMIs are the most tax-efficient option for both businesses and employees. The other schemes are: save as your earn scheme (SAYE), Share Incentive Plans (SIPs), Company Share Option Plan (CSOP).

What impact has been measured?

In the tax year ending 2021:

  • £510 million worth of options were granted
  • £750 million worth of relievable gain was exercised
  • To a total cost of £400 million in lost income tax and national insurance revenue
  • Over 4500 companies granted options

An evaluation for the EMI scheme published in 2018 found that:

  • The majority of adopters perceived EMI to be successful in helping companies retain key and skilled staff (84%)
  • and improve staff morale (85%).
  • Just over half said that EMI had helped with the recruitment of key workers (54%) and attracting higher quality employees (52%).
  • Robust econometric analysis using a control group-based approach indicates that EMI does aid recruitment efforts.
  • Both the control and early adopters experienced a reduction in the proportion of hard-to-fill vacancies since the baseline year, but the reduction was larger among early adopters (an average reduction of 10 percentage points from 26% to 16%) compared to the matched control group (a reduction of 4 percentage points from 22% to 18%).
  • The results also showed that the effect of adopting EMI feeds through into growth in the number of employees. The magnitude of this effect was estimated as a 26 per cent increase over three years (the equivalent of increasing from 24 employees to 30 - based on the average employment of EMI users in the matched sample in 2012/13).
  • The results of the econometric analysis also found that the EMI scheme had led to increased equity investment for some adopters.
  • However, analysis found that EMI had no measurable effect on retention rates or on R&D spending.
What lessons can be learned?

The primary research among EMI users found that the scheme has been mainly used by smaller, expanding companies which suggests that the target firms are self-selecting into the scheme. However, while EMI is also intended to target high risk businesses, only a small proportion of firms identify themselves as high risk. Additionally, the research found that few companies offered EMI to all staff and the survey revealed that seniority was by far the most common criteria for eligibility within firms.

CURATED BY

Tom Hancock

Research Associate
Global Entrepreneurship Network
United Kingdom