EMI Share Scheme UK 2026 — How Enterprise Management Incentives Work

The Enterprise Management Incentive (EMI) scheme is widely regarded as the most tax-efficient employee share option scheme available in the UK. It allows qualifying small companies to grant employees the right to buy shares at a fixed price in the future — and when those shares are eventually sold, the tax treatment can be dramatically better than ordinary income or even other share schemes.

For growing companies looking to attract and retain talented people without paying the highest salaries, EMI is a powerful tool. For employees, it represents an opportunity to share in the company’s growth with significant tax advantages built in.

This guide explains how EMI works, who qualifies, the tax treatment at each stage, and how EMI compares with other share schemes.

For the broader context on equity and business tax, see our Dividend Tax guide and the Self-Employment and Limited Companies hub.

What Is an EMI Option?

An EMI option gives an employee the right — but not the obligation — to buy a set number of shares in their employer at a fixed price (the exercise price), usually at some point in the future.

Here is how a typical EMI option journey looks:

The critical advantage: all the gain is taxed as Capital Gains Tax, not income tax. Even a higher-rate taxpayer pays 24% CGT rather than 40% or 45% income tax — and if Business Asset Disposal Relief (BADR) applies, the rate drops further.

Company Qualifying Conditions

Not every company can grant EMI options. HMRC imposes strict conditions:

Excluded Activities

Companies carrying on the following activities cannot grant EMI options (or cannot grant them in relation to that part of the business):

• Banking, insurance, and financial services
• Property development and letting (unless the main trade)
• Farming and market gardening
• Forestry
• Operating hotels or nursing homes
• Legal and accountancy services as a primary trade
• Energy generation (where the activity is the receipt of Feed-in Tariff payments)

If your company has a mix of qualifying and excluded activities, the excluded activities must not amount to a “substantial part” of the company’s business (HMRC treats this as broadly 20% or more).

Employee Qualifying Conditions

Individual employees must also satisfy a working time requirement:

• They must be committed to working at least 25 hours per week for the company; OR
• If they work fewer than 25 hours per week, EMI hours must represent at least 75% of their total working time across all jobs

This means that a highly paid consultant who only works one day a week for the company would not qualify. Directors who are also paid employees typically qualify provided they meet the time test.

Who cannot receive EMI options:

• Anyone who (together with associates) holds more than 30% of the company’s ordinary shares
• Non-employees (contractors, advisers)

EMI Option Limits

These limits apply to the value of options that have been granted but not yet exercised. Once an employee exercises their options and acquires shares, those shares no longer count toward the £250,000 individual limit — allowing new options to be granted up to the limit again.

Exceeding the limit: If options are granted that exceed the limit, only the excess loses EMI status — the remainder retains it. HMRC will treat the excess options as unapproved options, which have less favourable tax treatment.

Notifying HMRC

One of the most common mistakes companies make with EMI is missing the HMRC notification deadline. The company must:

1. Register the EMI scheme with HMRC through PAYE Online
2. Notify HMRC within 92 days of each option grant
3. File an annual EMI return by 6 July each year, reporting grants, exercises, lapses, and other events in the previous tax year

Miss the 92-day notification window and the options lose EMI status entirely — they become unapproved options with standard income tax treatment at exercise. This is a potentially expensive administrative error.

The Tax Treatment in Detail

At Grant

No income tax or National Insurance is due when EMI options are granted, regardless of the number of options or their value. No PAYE reporting is required for the grant itself (though the scheme must be registered and HMRC notified within 92 days).

At Exercise

Provided the options were granted at market value (the most common and recommended approach):

• No income tax at exercise
• No National Insurance at exercise
• The employee simply buys shares at the agreed exercise price

If options were granted below market value (at a discount), income tax and NI are charged on the discount at the point of exercise. For example, if shares were worth £5 at grant and options were granted at £3, the £2 discount is taxable income when exercised.

Tip: Always obtain an HMRC-agreed share valuation before granting EMI options. HMRC’s Shares and Assets Valuation team can confirm market value in advance, giving certainty to both the company and the employee.

At Disposal (Sale of Shares)

When the employee sells their shares, Capital Gains Tax applies on the gain from exercise price to sale price:

The annual CGT exempt amount (£3,000 in 2026/27) can be used to offset part of the gain. Remaining gains are taxed at:

Business Asset Disposal Relief reduces the rate to 18% on the first £1 million of qualifying lifetime gains from April 2026 (up from 14% in 2025/26).

The BADR Clock Starts at Grant — Not Exercise

This is the single biggest tax advantage of EMI over almost all other share schemes. To qualify for BADR, you normally need to hold shares for at least two years. For most shares, this two-year clock starts when you acquire the shares (i.e. when you exercise the option).

For EMI, the clock starts when the options are granted.

This means an employee can be granted EMI options today, exercise them in three years’ time, sell the shares one week later, and still qualify for the 18% BADR rate — because more than two years have passed since the grant date.

Worked Example: EMI Tax Saving

Sarah works at a tech startup. In January 2024, she is granted EMI options over 50,000 shares at an exercise price of £1 per share. The company is acquired in February 2027 and she sells all her shares at £6 per share.

Without EMI (if these were unapproved options treated as income at exercise):

• Income tax at 40% (higher-rate) on £250,000 = £100,000
• Employee NI at 2% (above £50,270) = approximately £3,993
• Total tax: ~£103,993

EMI saves Sarah approximately £59,500 in this scenario.

Disqualifying Events

EMI options can lose their tax advantages if a disqualifying event occurs before exercise. Common disqualifying events include:

After a disqualifying event, the employee has a limited window (typically 90 days for most events, 40 days for a company takeover) to exercise options and retain EMI tax treatment. After that window, exercises are treated as unapproved and income tax applies.

EMI vs Other Share Schemes

EMI is generally the most valuable scheme for employees of qualifying SMEs because of the high individual limit, zero income tax at exercise, and the BADR clock starting at grant rather than exercise.

Setting Up an EMI Scheme

Setting up EMI requires careful structuring and professional advice:

1. Confirm company and employee eligibility — check all conditions are met
2. Obtain a share valuation — agree market value with HMRC’s Shares and Assets Valuation team
3. Draft option agreements — covering exercise conditions, vesting schedule, and leaver provisions
4. Register the EMI scheme on HMRC’s PAYE Online service
5. Grant options and notify HMRC within 92 days
6. File annual returns by 6 July each year

Most companies use a specialist law firm or accountant to set up the scheme. Typical costs range from £1,500 to £5,000 for initial setup, plus annual compliance costs.

Key Takeaways

• EMI is HMRC-approved and offers the best tax treatment of any UK employee share option scheme for SMEs
• No income tax or NI at grant or exercise (when granted at market value)
• CGT only on disposal — at 18% with BADR, versus up to 45% income tax on equivalent cash bonus
• BADR two-year clock starts from grant date, not exercise date
• Company must have gross assets ≤ £30m and fewer than 250 employees
• HMRC must be notified within 92 days of each grant — missing this deadline is a costly mistake
• Annual returns must be filed by 6 July each year

For related reading, see our guides on Dividend Tax, Capital Gains Tax, and Limited Company vs Sole Trader.

Related Guide

• Employee Benefits & Tax UK 2026/27 — BIK, P11D and Salary Sacrifice