Attracting Talent with EMI and Employee Incentives

EMI is restricted to qualifying companies and qualifying employees. The company must have gross assets under £30m, fewer than 250 full-time equivalent employees, and trade in a qualifying activity (most do; banking, leasing, accountancy, and certain professional services are excluded). The trade test is a real filter for some startup categories, fintech is qualifying, but dealing in financial instruments may not be.

Qualifying employees must work at least 25 hours per week or commit at least 75% of their working time to the company, and may not hold more than 30% of the company's shares (counting connected persons). The 25/75 test catches part-time hires; the 30% test rarely binds for non-founder employees but does affect founder-employees who hold material founder shares.

The aggregate limit per employee is £250,000 of unexercised options at any one time, valued at the option grant date. The aggregate company limit is £3 million across all employees. Both limits are unexercised options, once an employee exercises, the limit resets and further grants can issue.

EMI scheme setup involves three workstreams running in parallel: corporate (board approval, shareholder approval if needed under the articles, share class creation if existing classes are not suitable), legal (the EMI plan rules, individual option agreement template, exercise mechanics), and tax (HMRC valuation request, scheme registration with HMRC, the 92-day notification process for individual grants).

End-to-end setup takes four to six weeks for a clean structure and £1,500-£3,500 in professional fees split across legal and accounting work. Most startups do this when they make the first hire that needs equity compensation; running EMI from day one is rarely necessary and adds complexity before the team needs it.

The valuation step is critical and is where many setups fail. The exercise price has to be at least the market value of the shares at grant date to qualify for the favourable EMI tax treatment. A specialist accountant submits a Form VAL231 to HMRC pre-grant, asking HMRC to agree the share price. HMRC's response (typically 4-6 weeks) is then used as the strike price for grants made within the validity period (60 days, sometimes extended).

Each EMI option grant must be notified to HMRC within 92 days of the grant date. The notification is a structured online filing through HMRC's ERS (Employment Related Securities) service. Late notification disqualifies the grant entirely, the option becomes a non-qualifying option taxed at income-tax rates on exercise rather than the EMI rate on sale.

This is the single most common EMI scheme error. Founders set up the scheme, grant options to an early hire, and miss the 92-day deadline because no one is monitoring the calendar. The hire discovers years later, at exercise, that the £200k notional gain triggers £80k+ of personal income tax instead of the £28k of CGT they expected.

Specialist startup accountants put the 92-day deadline into a recurring reminder for every grant cycle and run the notification themselves rather than leaving it to the founder. The fix for a missed notification is non-trivial, HMRC will sometimes accept late notifications with reasonable excuse but the bar is high and the relief is not assured.

An EMI grant that was qualifying at grant can become disqualified later by a subsequent corporate event. The most common disqualifying events: the company ceases to qualify (gross assets exceed £30m, employee count exceeds 250, the company is acquired by a non-qualifying parent), the option is varied materially, or the employee no longer works the qualifying hours.

Disqualifying events do not retroactively destroy the relief on the period before the event, but they do close down the favourable treatment from the event date. An option exercised more than 90 days after a disqualifying event loses EMI status. This is most commonly an issue at acquisition: the buyer is a non-qualifying parent, the acquired company stops qualifying, employees who do not exercise within 90 days lose EMI relief.

Specialist startup accountants run the qualifying-event check at every fundraise and at any point where the company structure changes materially. When a disqualifying event is anticipated, the standard playbook is to push exercise within the 90-day window so the relief is locked in before the structural change.

Companies that do not qualify for EMI (oversized, wrong trade, US-parent, etc.) have several alternatives, each with different tax treatments. Company Share Option Plan (CSOP) is the closest equivalent: tax-advantaged but with a £60,000 individual limit and stricter qualifying conditions on the underlying shares. Share Incentive Plans (SIP) and Save As You Earn (SAYE) are less common in startup contexts but valid for some structures.

Unapproved options (sometimes called 'NSOs' borrowing US terminology) have no qualifying conditions but no tax advantages, taxed as employment income at exercise. They are commonly used for non-employees (advisors, contractors) who cannot hold EMI options. The tax treatment is straightforward but the cash impact at exercise often catches employees out.

Growth shares are an alternative structure used by companies that cannot run EMI schemes for some employees and want the equivalent economic outcome with a different tax profile. The shares are issued with a hurdle: only growth above a threshold value crystallises to the holder, with the threshold set so the gift element at issue is minimal. The structure works but requires legal and valuation work upfront.

Vesting schedules attached to EMI options are standard: most UK startups use 4-year vesting with a 1-year cliff, mirroring US conventions. Vesting can be performance-based or time-based; HMRC accepts both for EMI, with appropriate conditions in the option agreement.

Leaver provisions are where the soft conversation happens. Good-leaver / bad-leaver definitions in the option agreement determine what happens to vested and unvested options when the employee departs. Typical structure: vested options retained for a window (90 days for good leavers, immediate forfeit for bad leavers), unvested options forfeit on departure. The definitions matter, 'cause' for bad-leaver dismissal needs to be tightly drafted or it becomes a litigation hook.

At exit, EMI options that have been exercised attract Business Asset Disposal Relief at 14%, subject to the £1m lifetime limit. Options exercised within 90 days of an exit event still qualify for EMI relief if the underlying scheme conditions were satisfied. Specialist startup accountants run the BADR confirmation 12-24 months pre-exit because the qualifying conditions can be unwound by share class restructures or director departures.