Enterprise Management Incentive (EMI)
An Enterprise Management Incentive (EMI) scheme is a registered scheme that allows employers to give tax-free shares to their employees as a reward for their efforts at work.
If you’re an employee receiving EMI share options:
- you don’t need to pay Income Tax or National Insurance if you buy the shares for at least the market value they had when you were granted the options (an option is an agreement to buy the shares in the future at a set price, called “strike price”)
- and you pay a reduced rate of Capital Gains Tax when you sell the shares for a profit: only 10%.
Example of how EMI options work:
- you join a startup and you’re given 1,000 EMI share options (besides your salary)
- the strike price is £10 per share
- and the market price at the time is also £10: because it’s the same as the strike price, you don’t pay any Income Tax or NI
- you “exercise” your options (meaning you actually buy the shares) a year later, when the market value is £15 per share: because they’re EMI shares, you don’t pay any tax now, either
- and you sell them five years later when they’re worth £50 per share
- you made a profit of £40,000 (£50,000 at market value minus the £10,000 that you paid for them)
- but you only have to pay £2,770 in Capital Gains Tax (first £12,300 are tax-free, and then you only pay 10% on the remaining profit).
If these were not EMI, then you would have paid:
- employee rate Income Tax and National Insurance on the £5,000 when you purchased (the difference between the market value and what you paid). Depending on your salary and tax code, this could be anywhere from £0 to £3,000
- a higher Capital Gains Tax when selling the shares. Again depending on your salary, this could be anywhere from £3,200 to £5,600.
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