You want to hire brilliant people, but you can't match the salaries that bigger, better-funded firms throw around. A share scheme lets you offer something a payslip can't: a real stake in what you're building together.
For most UK startups, the smartest way to do that is an Enterprise Management Incentive, or EMI. It's the government's most tax-efficient share option scheme, designed specifically for small, high-growth companies. Used well, your key people pay little or no Income Tax on their options, and you keep your cash for growth.
This guide explains who qualifies, how the tax works, the limits you need to respect, and the steps to set a scheme up properly. We've kept it practical, because the detail is where these schemes go wrong.
What are EMI share options?
An EMI option is a legal right for an employee to buy shares in your company at a fixed price, on a future date, if they choose to. The fixed price is called the exercise price, and it's usually set at the market value of the shares on the day the option is granted.
The idea is simple. If the company grows and the shares become worth more, the employee can exercise their option, buy at the old low price, and own shares worth a lot more. If the company doesn't grow, they simply don't exercise, and they've lost nothing.
Options normally vest over time, often three or four years, so people have a reason to stay. Many schemes are also "exit only", meaning options can only be exercised when the company is sold or floated. That keeps things simple while you're still private.
EMI is a statutory scheme set up by HMRC, so it comes with generous tax reliefs as long as you stick to the rules. That's what makes it different from just handing out ordinary share options.
Why do startups use EMI schemes?
Cash is tight in the early years, and salaries are only part of the story. An EMI scheme lets you:
- Attract talent you couldn't otherwise afford. A share stake can bridge the gap between your offer and a corporate salary.
- Keep your best people. Vesting over several years gives staff a reason to stay and build value.
- Align everyone behind growth. When the team owns a slice of the upside, an exit becomes a shared goal.
- Reward without spending cash. You're sharing future value, not paying out today.
There's a benefit for the company too. When employees exercise their EMI options, your company can usually claim a Corporation Tax deduction for the difference between the market value of the shares at exercise and the price the employee pays. That's a genuine saving against your Corporation Tax bill.
Does your company qualify for EMI?
Not every business can offer EMI options. Your company has to meet several conditions on the date options are granted.
For 2025/26, the main company conditions are:
| Condition | Requirement (2025/26) |
|---|---|
| Gross assets | £30 million or less |
| Employees | Fewer than 250 full-time equivalent |
| Trade | Must carry on a qualifying trade |
| Independence | Not controlled by another company |
| UK presence | Must have a UK permanent establishment |
A few of these are worth a closer look.
Qualifying trade. Most ordinary trading companies qualify. But some activities are excluded, including banking and other financial activities, property development, farming, legal and accountancy services, and ship building. If "excluded activities" make up a substantial part of what you do, you won't qualify.
Gross assets and headcount. These are the limits that catch larger, scaling businesses. From 6 April 2026 the gross assets ceiling rises to £120 million and the employee limit rises to fewer than 500, which widens the door for bigger companies. For options granted in 2025/26, though, the £30 million and 250-employee limits still apply.
If you're not sure whether your trade qualifies, that's exactly the kind of thing to check before you grant anything. Our tax advisory team can give you a clear yes or no.
Which employees can be granted EMI options?
EMI is for employees, not contractors or consultants. The key test is the working time requirement.
To hold EMI options, an employee must work for the company (or a qualifying subsidiary) for at least 25 hours a week, or, if they work fewer hours, at least 75% of their total working time. Someone juggling several jobs needs to be spending the bulk of their working life with you.
There's one more individual restriction. An employee can't hold EMI options if they have a "material interest" in the company, broadly meaning they already control more than 30% of the shares. EMI is designed to reward employees, not to hand existing major shareholders a tax break.
This makes EMI a natural fit for the kind of teams that power UK startups and growing limited companies: early engineers, a first head of sales, an operations lead, the people whose effort moves the needle.
How are EMI share options taxed?
This is where EMI earns its reputation. Handled correctly, it's one of the most tax-efficient ways to reward staff in the UK.
On grant. Nothing to pay. Granting an EMI option triggers no Income Tax or National Insurance.
On exercise. If the exercise price was set at or above the market value of the shares when the option was granted, there's no Income Tax or National Insurance to pay when the employee buys the shares. This is the heart of the scheme. If you granted the option at a discount to market value, the employee pays Income Tax (and possibly National Insurance) on that discount, but only on the discount, not the whole gain.
On sale. When the employee eventually sells the shares, they may pay Capital Gains Tax on the growth in value. For 2025/26 the Capital Gains Tax rates on most assets are 18% within the basic rate band and 24% above it. Each individual also has an annual tax-free allowance, the Annual Exempt Amount, of £3,000 for 2025/26.
Here's the part that really matters for EMI. Shares acquired through EMI options can qualify for Business Asset Disposal Relief (BADR), which charges Capital Gains Tax at a reduced rate of 14% for 2025/26 (for disposals on or after 6 April 2025). Normally BADR requires you to hold at least 5% of the company, but for EMI shares that 5% rule doesn't apply. The employee just needs to have held the option for at least two years before selling, and to have stayed an employee through that period.
So a well-run EMI scheme can mean no Income Tax, no National Insurance, and Capital Gains Tax at 14% rather than 24% on the gain. That gap is the whole point.
Worked example: what an employee actually pays
Illustrative example. Sam is an early employee at a software startup. The company grants Sam an EMI option over 10,000 shares at an exercise price of £1 per share, which is the agreed market value at the date of grant. So the option will cost Sam £10,000 to exercise.
Three years later the company is acquired, and the shares are worth £6 each. Sam exercises the option and immediately sells.
| Step | Figure |
|---|---|
| Sale proceeds (10,000 x £6) | £60,000 |
| Cost of shares (10,000 x £1) | £10,000 |
| Capital gain | £50,000 |
| Less Annual Exempt Amount (2025/26) | £3,000 |
| Taxable gain | £47,000 |
Because Sam set the exercise price at market value on grant, there's no Income Tax or National Insurance at exercise. The whole £50,000 gain falls under Capital Gains Tax.
Sam held the option for more than two years and stayed an employee throughout, so the shares qualify for Business Asset Disposal Relief. The tax is:
- With EMI and BADR: £47,000 x 14% = £6,580
- Without that relief, at the 24% rate: £47,000 x 24% = £11,280
The EMI route saves Sam £4,700 of Capital Gains Tax on this disposal, and crucially there was no Income Tax or National Insurance on the way through. Figures are for 2025/26 and assume Sam has used no other allowances elsewhere; your own numbers will differ.
What are the EMI limits?
EMI is generous, but it's capped. Two limits matter.
- £250,000 per employee. Any one employee can hold unexercised EMI options worth up to £250,000 (measured at the date of grant) over a three-year period. Grant more than that, and the excess doesn't get EMI treatment.
- £3 million company limit. The total value of unexercised EMI options across all your employees can't exceed £3 million at any time, measured by the unrestricted market value of the shares at grant.
There are also rules on timing. Options must be capable of being exercised within 10 years of grant (rising to 15 years for options granted from 6 April 2026), or the tax advantages are lost. And if there's a "disqualifying event", such as the company no longer meeting the conditions, employees usually have 90 days to exercise before the tax benefits start to slip away.
If you're approaching any of these limits, plan the grants carefully. Getting the valuation and the paperwork right is what protects the relief.
How do you set up an EMI scheme?
Setting up EMI is a project with a clear running order. Skip a step and you can lose the tax relief entirely.
- Check eligibility. Confirm the company qualifies and the employees meet the working time test.
- Agree a share valuation with HMRC. You can ask HMRC to agree the market value of your shares before granting. This isn't compulsory, but it gives you certainty that the exercise price is right, which protects the Income Tax relief.
- Design the scheme. Decide how many shares, the exercise price, vesting schedule, and whether it's exit only.
- Draft the documents. You'll need an option agreement for each employee and usually board approval. The legal drafting and company records sit alongside your company secretarial work.
- Grant the options. Sign the agreements and update your statutory records.
- Notify HMRC. This is the step companies most often get wrong. For options granted on or after 6 April 2024, you must tell HMRC about each grant by 6 July following the end of the tax year in which the option was granted. Miss the deadline and the options may not qualify as EMI at all.
- File the annual return. You report on the scheme each year through HMRC's online service.
The valuation, the notification deadline, and the annual return are the three points where relief is most often lost. Build them into a checklist and they're easy to keep on top of.
Thinking about an EMI scheme for your team? Zmartly can check your eligibility, handle the HMRC valuation and notification, and keep the scheme compliant year on year. Book a free call with a Zmartly accountant and we'll map out the right approach for your startup.
Frequently asked questions
Do employees pay tax when EMI options are granted?
No. Granting an EMI option triggers no Income Tax or National Insurance. Tax only becomes relevant later, and even then it's often only Capital Gains Tax when the shares are sold, provided the option was granted at market value.
What is the maximum value of EMI options an employee can hold?
An employee can hold unexercised EMI options worth up to £250,000 (measured at the date of grant) over a three-year period. The total across all employees is capped at £3 million of unexercised options for the company.
Can my company offer EMI if it provides professional services?
It depends on the trade. Some activities are excluded, including banking, property development, farming, legal services, accountancy and ship building. If excluded activities form a substantial part of your business you won't qualify, so it's worth checking your specific trade before granting any options.
What happens to EMI options if the company is sold?
Many schemes are written so options can be exercised on a sale. Employees exercise just before completion, buy their shares, and sell them as part of the deal. If the option has been held for at least two years and the conditions are met, the gain can qualify for Business Asset Disposal Relief at 14% for 2025/26.
Do we have to agree a valuation with HMRC?
It isn't compulsory, but it's strongly recommended. Agreeing the market value with HMRC before you grant options gives you certainty that the exercise price is correct, which is what protects the Income Tax relief at exercise.
What is the deadline to tell HMRC about EMI options?
For options granted on or after 6 April 2024, you must notify HMRC by 6 July following the end of the tax year in which the option was granted. Missing this deadline can mean the options lose their EMI status, so put it in your compliance calendar.
