Sharing ownership boosts performance, loyalty, employee happiness, and total business value, according to a recent research. Furthermore, it is now simpler than ever to distribute team shares in a secure, legal, and economical way. Employers can find a lawyer who can guide them to allocate equity properly and legitimately. There are two options, one of them is Enterprise Management Incentive.
What is an EMI scheme?
The EMI (Enterprise Management Incentive) is a government initiative designed to help smaller businesses. Because it takes the hassle out of granting equity, it allows them to attract and incentivise employees.
While businesses don’t need a plan approved by the HMRC to provide options to their employees, the downside is that the latter won’t receive any tax benefits.
On the contrary, an EMI will have a valuation of their shares that HMRC will accept. Using this, they can decide on the strike price employees will pay to execute their stock options.
Eligibility for EMI Share Options
A company or business qualifies for the EMI share options scheme if:
- The gross income is £30m or less
- They have less than 250 full-time equivalent employees
- Every employee devotes 75% of their entire working time, or at least 25 hours per week, to the business.
- Is not majorly or wholly owned by another company
- Is not a part of excluded companies (farming, banking, property development, etc.)
An employee is eligible for EMI share options if he:
- Does not hold >30% of the company shares
- Works for a minimum of 25 hours a week or 75% of their total working time as an employee.
- Has EMI share options of > £250,000 when the grant is provided.
Note: You may contact a corporate lawyer to help you set an EMI scheme.
How does it work?
EMI allows employees to buy shares in the businesses they are working in at an agreed price. They must also meet certain requirements. For instance, service period and/or performance. The cost that an employee incurs is the share price at the time of grant.
In the majority of cases, the shares’ value will have increased by the time the option is exercised; thus, the employee will pay a reduced price.
And when the share price rises, the employee can sell the shares with profit and tax advantages.
What are the tax advantages for an employee?
Employees need not pay income tax or NICs when he accepts the grant. Nothing is due.
However, when an employee exercises the EMI share option, if the cost of the shares is ‘=’ or ‘>’ than the AMV (Actual Market Value) at the time it was granted, the employee owes no tax or NIC.
Also, when the employee decides to sell off the shares, the employee must pay CGT (Capital Gains Tax) on the profit. Although, it must be noted that the CGT rate is at a 10% Entrepreneur’s Relief level against 12%.
Other benefits of EMI Share Options
Other than the taxes, an employee will receive several benefits:
Numerous studies have shown that employee-owners tend to have a lower turnover rate, fewer absenteeism days, more commitment to their company, increased motivation, and a higher number of performance improvement proposals.
Talent acquisition and retention
Because of HMRC’s tax benefits and terms, employees are less likely to face financial risk by choosing between a low salary and a higher EMI share.
Flexibility for the employer
The employer is free to decide who to grant the share to, the number, and the exercise price. It is unlike the other employee share schemes.
Select the Right Lawyer for you
Unfortunately, some dangers are associated with this EMI share option, as there are with any tax-advantaged incentive plans. The HMRC’s responsibility is to ensure the correct businesses receive the programme’s benefits, and getting the details right might mean the difference between a successful strategy and a failed one.
If you find yourself in this situation, contact Mishoura. They will connect you with the right business lawyer.