Definition
A form of employee incentive that grants workers the right to purchase shares in their employer's company at a predetermined price, often at a discount, after a specified vesting period.
UK Context
HMRC offers four tax-advantaged share schemes: EMI (up to 250,000 pounds per employee, companies under 30 million pounds gross assets), CSOP (up to 60,000 pounds per employee), SIP (free, partnership, and matching shares), and SAYE (savings-linked options at up to 20% discount). EMI is the most popular for SMEs due to its generous limits and favourable CGT treatment on exercise.
Best Practices
- Choose the most appropriate HMRC-approved scheme based on company size, structure, and objectives
- Seek specialist legal and tax advice before establishing any share option scheme
- Communicate the value and mechanics of share options clearly to employees, many of whom will be unfamiliar
- Ensure share option agreements include clear good leaver and bad leaver provisions
- File the required HMRC notifications and annual returns on time to maintain tax-advantaged status
Frequently Asked Questions
What is an EMI share option scheme?
The Enterprise Management Incentive (EMI) is an HMRC-approved share option scheme for companies with gross assets under 30 million pounds and fewer than 250 employees. It allows options over shares worth up to 250,000 pounds per employee with favourable tax treatment: no income tax or NIC on exercise, and Capital Gains Tax at potentially 10% on disposal.
How are share options taxed in the UK?
Tax treatment depends on the scheme type. EMI and CSOP options benefit from no income tax on exercise if qualifying conditions are met. Unapproved options are subject to income tax and NIC on the difference between the exercise price and market value at exercise. All options may be subject to CGT on subsequent disposal of shares.
What happens to share options when an employee leaves?
This depends on the scheme rules and the leaver's status. Good leavers (redundancy, retirement, ill health) typically have a window to exercise vested options. Bad leavers (resignation, dismissal) may forfeit unvested and sometimes vested options. The specific terms should be clearly set out in the option agreement.