How can I give my employees share options?

There are many types of share options available to use in order to motivate your employees and provide them with a stake in the business.

The most tax efficient for both the company and employees are “approved” option schemes and for SME’s the Enterprise Management Investment (EMI) scheme is probably the most tax efficient approved option plan available for their employees.

What companies can use EMI?

  • Company needs to have a “permanent establishment” (PE) in the UK (or a subsidiary with a PE in the UK)

  • Company must have less than 250 employees

  • Company (or group) must have gross assets less than £30m

  • Company (or group) must have less than 250 employees

  • Total value of EMI options granted cannot be greater than £3m

  • Each employee can be granted options over shares with a market value of up to £250,000 at the date of grant

  • Shares must be issued by parent company

What employees can be granted EMI options?

  • The company can grant EMI options to any number of employees subject to the 250 employee limit mentioned above

  • EMI options cannot be granted to any employee with a “material interest” in the company, which is defined as them owning 30% or more of the company’s ordinary share capital

  • The employee must work for the company for at least 25 hours per week, or if less, at least 75% of their total working time

  • Employers have the freedom to chose which employees satisfying these conditions can participate in EMI.  It doesn’t have to be open to all employees

How are these options taxed on the employee?

  • No income tax or NICs when an option is granted

  • No income tax or NICs when the option is exercised provided the options are actual market value options and can be exercised within 10 years of grant

  • The exercise price can be set at a discount or premium to market value at the time of grant. If a discount is given, this will be subject to income tax, and possibly NICs, on exercise.

  • Capital Gains Tax will be payable when the shares are sold with gains attracting either a 10%, 18% or 28% tax rate dependent on whether Entrepreneurs’ Relief is available, or, if not, if the individual is a basic rate or higher rate tax payer.

So therefore if an employee is granted EMI options then potentially they will only have to pay tax when the shares are ultimately sold.  Assuming they qualify for Entrepreneurs Relief when they come to sell these shares then the tax rate they pay will be just 10% on any gain they make on these shares.