Guest blog from Raffingers - Award-winning chartered accountants.
You can help attract and retain your key employees by rewarding them with a tax favoured scheme - an Enterprise Management Incentive (EMI).
An EMI share option scheme provides significant tax advantages for your employees. Put simply, an ‘EMI’ scheme is by far the most tax beneficial structure for staff having been introduced in order to assist growing companies in attracting and retaining key employees and to reward those employees for taking the risk to work for such companies.
Very simply put, an EMI scheme works by getting your company to sign a legal agreement with an employee that gives them a right to buy a set number of the company’s shares at a given price at some point in the future. The right to buy the shares ‘vests’ on that future date, so the employee can buy them immediately or they can wait until a later date, perhaps the day that the company is acquired (an ‘exit’ event), in trade sale, management buyout or even a flotation on a stock exchange. This means that your key employees will feel more committed to the company and are all working towards a common goal.
If two employees were granted with shares worth £5,000, at a value agreed with HM Revenue and Customs (HMRC). Under non-EMI circumstances, the employee can be taxed as much as 45% based on PAYE, whereas shares purchased under the EMI scheme are tax-free and only Capital Gains Tax (CGT) is chargeable at 10%.
Therefore, over a span of five years, the share value increases to £50,000, giving the individual a total gain of £45,000 when sold. Without the EMI scheme, just over £20,000 is taxed leaving the individual with just over £24,000. The EMI scheme is significantly more favourable as just under £5,000 is taxed leaving the employee with over £40,000 after CGT.
There are a number of conditions that must be met and approved by HMRC in order to be registered for the scheme. To qualify:
The EMI scheme offers several advantages to your key employees:
In short, EMI schemes are an ideal way for small and growing businesses to offer an extra incentive to their employees, to reward their commitment and loyalty. For further information and advice on EMIs, please contact Lee Manning at firstname.lastname@example.org.