Attracting and retaining high-quality staff is a critical concern for any business. However, for early-stage start-ups, this can present challenges. New businesses often won’t have an established reputation to draw in new staff. They may also struggle to match market-rate salaries offered by established competitors. Any new employees are, to some extent, taking a risk on the future success of the business. This often means potentially taking a lower salary in a riskier venture.
One way of addressing this is to provide additional employee incentives over and above core salary. Employee share schemes are one example of an established and effective employee incentive.
Employee share schemes: a powerful incentive
Workplace share schemes offer employees the opportunity to acquire shares in the business (usually at a preferential rate). Being a shareholder in the company is a powerful motivator for employees as they are directly invested in the profitability and success of the venture. Share schemes have several advantages over other employee incentives such as cash bonuses. Bonuses are subject to income tax and national insurance contributions and also directly impact company profits. In contrast, a share scheme can be a more attractive option, both in terms of tax for the employee and affordability for the business.
Enterprise Management Incentives (EMI) – overview and advantages
Enterprise Management Incentives (EMI) options are commonly utilised by start-ups looking for a share scheme. An EMI scheme gives employees the option to purchase shares in the company and can offer employees certain income tax benefits. There is no income tax on the award or exercise of options, only 10% capital gains on the sale of shares. EMI schemes can also offer corporation tax benefits to the company.
As well as increasing employee motivation, EMI schemes can also provide financial savings to the business if options are offered in a way that offsets salary. Some employers place additional conditions on the scheme so that options can only be exercised if the employee stays with the company; further incentivising staff to be invested in the company’s success.
Eligibility criteria for EMI schemes
There are some eligibility criteria that companies must meet to utilise EMI schemes.
- EMI schemes are for small to medium companies: under 250 employees and with gross assets less than £30m.
- Not all trades are eligible; for instance, property investment and legal services firms do not qualify.
- Companies must be independent and have a permanent base in the UK.
How Enterprise Management Incentives (EMI) schemes work
Employees are offered an EMI option to buy company shares, usually at a future date. The price that the employee pays is usually set at the point of offer, with the hope that share prices have increased in the interim. The benefit to the employee, therefore, is that at the point of exercising the option, they are acquiring shares at a discounted rate, as the price they pay was secured at the option.
Employees are under no obligation to exercise the option, so in the event of share prices not rising, or even falling, they are not tied into the purchase. There are some restrictions; shares must be ordinary shares and cannot be purchased back by the company. The agreement also needs to be carefully documented to ensure it complies with scheme rules.
What are some of the tax advantages of EMI schemes?
Providing the option exercise price is equal to, or exceeds the market value at the time of option grant, there is no income tax or NI paid by the employee. Capital gains tax does apply to any gains made on the sales of shares acquired through EMI. However, if the employee meets certain conditions in terms of their length of service and the time elapsed when they sell shares, they may pay a lower rate of 10% capital gains tax.
As the employer, there may also be tax benefits. If set up correctly, you will usually be able to claim a corporation tax deduction for the amount of an employee’s option gains.
Disadvantages of EMI schemes
As with everything, there are some limitations or even disadvantages to EMI schemes. Only employees can get the tax benefits, so advisors and consultants are not eligible. There are also some costs to implement them and some ongoing reporting obligations, though these are fairly minimal.
How you set up your EMI scheme is critical and errors in scheme set up can cause significant problems. Companies can find themselves in difficulty if they make mistakes in awarding too much or too early or in missing crucial HMRC filing deadlines. For this reason, it is well worth seeking legal advice for setting up an EMI scheme.
Get expert legal advice on setting up an EMI scheme
For many businesses, particularly early-stage start-up ventures, EMI schemes can present a great opportunity. They can incentivise and motivate staff and there are financial benefits to employees and employers alike.
Correctly setting up an EMI scheme is critical to ensuring employees and employers experience the benefits and there are criteria and regulations to follow.
If you’re interested in setting up an EMI scheme for your business then seeking legal advice is an important step and can help to reduce your risks. We specialise in helping start-ups and high-growth ventures establish employee incentives schemes like EMI.
For a no-obligation discussion to discover how we could help your business, please contact us today.