Enterprise Management Incentives (EMI) are the most tax-efficient way for UK startups to give employees a stake in the company. If you are a UK-incorporated company with fewer than 250 employees and gross assets under £30 million, EMI options can help you compete with bigger companies for talent — without the cash outlay. This guide covers every step from deciding to offer EMI options to the HMRC notifications and filing requirements, plus common mistakes that can cost you the scheme's tax advantages.
Why EMI matters for startups
- Employees pay 10% Capital Gains Tax (CGT) instead of up to 47% income tax when they exercise and sell
- No income tax or National Insurance on exercise (if granted at or above market value)
- The company gets Corporation Tax relief on the gain when options are exercised
- EMI is specifically designed for small, high-growth companies — your startup is the target user
Is your company eligible for EMI?
Not all companies qualify. Here are the requirements:
- UK company: must be incorporated in the UK or have a permanent establishment in the UK.
- Trading company: must carry on a "qualifying trade." Property development, financial services, and some other activities are excluded.
- Size limits: fewer than 250 full-time equivalent employees and gross assets of no more than £30 million.
- Independence: the company must not be a subsidiary of another company (or must be a subsidiary of a qualifying group).
- Total EMI options limit: the total value of unexercised EMI options across all employees cannot exceed £30 million (based on market value at grant).
- Per-employee limit: each employee can hold EMI options over shares worth up to £250,000 (market value at grant).
Which employees can receive EMI options?
Employees must meet these criteria:
- Must be an employee of the company (or a qualifying subsidiary).
- Must work at least 25 hours per week or, if less, at least 75% of their working time for the company.
- Must not hold (together with associates) more than 30% of the ordinary share capital of the company.
- Directors can qualify if they meet the working time requirement.
- Contractors and consultants are not eligible — they must be on payroll.
Step-by-step: setting up an EMI scheme
Step 1: Get a share valuation agreed with HMRC
Before you can grant EMI options, you need to know the market value of the shares. Submit a valuation to HMRC's Shares and Assets Valuation (SAV) team using the online service. HMRC will review your submission and either agree to the value, propose an alternative, or ask for more information. This process typically takes 4–8 weeks. Once agreed, the valuation is typically valid for 90 days.
Step 2: Draft the EMI option agreement
Work with a lawyer to draft the option agreement. Key terms include:
- Number of shares under option
- Exercise price (should be at or above the HMRC-agreed market value)
- Vesting schedule (typically 4 years with a 1-year cliff)
- Exercise window and conditions
- Good leaver / bad leaver provisions
- What happens on a sale of the company, IPO, or other exit event
Step 3: Board approval and grant
The board must formally resolve to grant the options. Record this in board minutes. The grant date is the date the board approves the option — not the date the employee signs the agreement.
Step 4: Employee signs the option agreement
The employee reviews and signs the option agreement. This must include a "declaration" that the employee has been informed that the option is intended to be an EMI option and agrees to the terms. Using e-signatures for this is perfectly acceptable and speeds up the process significantly.
Step 5: Notify HMRC within 92 days
This is critical. You must notify HMRC of each EMI option grant within 92 days of the grant date using the online ERS (Employment Related Securities) service. If you miss this deadline, the option loses its EMI tax advantages and is treated as a non-qualifying option — which means income tax and NI on exercise.
Do not miss the 92-day deadline
The 92-day notification deadline is the most common reason EMI options lose their tax-advantaged status. Set a calendar reminder on the grant date and follow up immediately. HMRC does not make exceptions for late notifications.
Step 6: Annual reporting
Each tax year, you must file an EMI annual return through the ERS online service by 6 July following the end of the tax year. This return reports any exercises, releases, or other events that occurred during the year.
Tax treatment: the full picture
| Event | Income tax | NI (employee) | NI (employer) | CGT |
|---|---|---|---|---|
| Grant (at or above MV) | None | None | None | None |
| Exercise (within 10 yrs) | None* | None | None | None |
| Sale of shares | None | None | None | 10% BADR** |
* If the exercise price is below the market value at grant, income tax applies to the discount. ** Business Asset Disposal Relief (formerly Entrepreneurs' Relief) applies up to the £1M lifetime limit, reducing CGT to 10%. Above that limit, standard CGT rates apply. Rates as of 2025/26 tax year.
Vesting and leavers
Most EMI schemes follow a standard vesting pattern:
- 4-year vesting with 1-year cliff: no options vest in the first year. After the cliff, 25% vests immediately, and the remaining 75% vests monthly or quarterly over 3 years.
- Good leaver: an employee who leaves voluntarily after the cliff (or is made redundant) typically keeps their vested options and has a window (e.g., 90 days) to exercise them.
- Bad leaver: an employee dismissed for cause typically forfeits all options — vested and unvested.
- Change of control / exit: most schemes include "accelerated vesting" provisions that vest all or some unvested options upon a sale of the company. This is negotiable and should be clearly defined in the option agreement.
Common mistakes that cost tax advantages
- Granting options below market value: if the exercise price is below the HMRC-agreed value, the discount is subject to income tax on exercise. Always use the HMRC-agreed value or higher.
- Missing the 92-day notification: as mentioned above, this is the most common and most costly mistake.
- Not getting a valuation: granting EMI options without an HMRC-agreed valuation means you have no certainty about the exercise price and could face challenges.
- Granting to ineligible employees: contractors, employees who work less than 25 hours per week, and 30%+ shareholders cannot receive EMI options.
- Exceeding limits: granting more than £250,000 per employee or £30M in total unexercised options means the excess is treated as non-qualifying.
- Failing to file annual returns: missing the 6 July filing deadline can result in penalties and complications.
- Disqualifying events: certain changes to the company (such as becoming a subsidiary or no longer carrying on a qualifying trade) can disqualify existing EMI options.
EMI vs other UK share schemes
| Scheme | Best for | Tax advantage | Key limitation |
|---|---|---|---|
| EMI | Small/medium trading companies | 10% CGT, no income tax/NI on exercise | £250K per employee, 250 employees max |
| CSOP | Companies too large for EMI | No income tax on exercise (if held 3+ years) | £60K per employee limit |
| Growth shares | Companies that want to give immediate ownership | CGT only on increase above hurdle | More complex to set up, requires new share class |
| Unapproved options | Fallback when EMI/CSOP not available | None — income tax + NI on exercise | No tax advantage, but no limits |
How eSignHub helps with EMI administration
Managing EMI options involves multiple documents (option agreements, board resolutions, exercise notices) and critical deadlines (92-day notification, annual returns). eSignHub brings this together:
- E-sign option agreements: send templated option agreements for employee signature, with automatic reminders and tracking.
- Cap table integration: option grants are automatically reflected in your cap table, so ownership percentages stay accurate.
- Audit trail: every document is time-stamped and stored, providing the paper trail HMRC expects.
- Deal room: share scheme documentation, board resolutions, and HMRC correspondence in a secure, organized space.
Not legal or tax advice
This guide is for informational purposes only. EMI schemes involve complex tax and employment law. Work with a qualified solicitor and tax advisor to set up and administer your scheme.
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