EMI options – How to get them right

Enterprise Management Incentive (EMI) plans are an excellent mechanism for employers and employees – when used correctly. There are a few ways that things can go wrong so it is important for businesses to ensure they get the right support when implementing an EMI plan. The changes in the Autumn 2025 Budget significantly expanded the scope of companies who might qualify. To assist companies who are thinking of setting up an EMI plan for the first time, we look at some of the most common issues and how to avoid falling into these traps.

Valuations

One of the main benefits of EMI plans is that they are tax advantaged. When done correctly, there is no income tax or national insurance contributions (NICs) chargeable on exercise and instead gains are considered under the more favourable capital gains tax regime. However, this income tax/NICs relief only applies to any growth in value from the date of grant and so understanding what the market value is at the date of grant is crucial.

To counter this problem, it is recommended that a formal valuation from HMRC is obtained prior to the issue of shares. This is done by completing a VAL231 form and returning it to HMRC who will provide a valuation that is valid for 90 days. This means that when the employee wishes to exercise their option, there will be no surprise income tax liability as, provided the option is granted with an exercise price matching the HMRC valuation (and no disqualifying event takes place), there will be no tax due until the shares are disposed of.

We often see issues where the valuation agreed with HMRC does not match the circumstances at the time – they are only useful if the information submitted to HMRC is accurate. Be careful when granting options in the run up to an investment or other significant milestones that might affect the share price. While we cannot provide share valuation advice, we work closely with specialist firms of accountants in this area and can help you get the right advice.

The Independence test

Apart from the valuation issues presented by granting options while in discussions around a sale of the business, there is a wider problem that EMI options can only be granted by companies that are not under the control of another company, or arrangements are in place where the company could come under such control. Companies in this scenario or in any doubt about this test are strongly encouraged to seek professional advice before granting EMI options.

The overall and individual limits

An employer cannot issue EMI share options (from 6 April 2026) with a market value of more than £6 million at any one time – increased in the recent budget from the current limit of £3 million. If the share valuation has not been agreed with HMRC, there is a risk of differing views on the valuation and the options exceeding these limits, which would expose the options to tax and NICs (including employer NICs) on exercise.

An individual employee can hold unexercised EMI options to a limit of £250,000. Once this limit is exceeded, anything further is considered a non-tax-advantaged option. Furthermore, when an employee holds EMI options with a value of £250,000, new EMI options cannot be granted for three years, regardless of whether some or all of the existing options have been exercised or released.

An HMRC agreed valuation means employers can be confident in the operation of these limits. It is also pivotal that employers keep track of the number of options held by an individual at any one time and their status.

Disqualifying events

There are a number of occurrences which are considered “disqualifying events” for EMI options set out in the relevant legislation. When a disqualifying event occurs, options only have 90 days to be exercised or they will lose their tax-advantaged status. This makes it critical that businesses are aware of what exactly constitutes a disqualifying event and that they are placed to facilitate the exercise of options if one should occur.

EMIs and CSOPs

If a business outgrows the statutory limitations of an EMI plan, they may choose to introduce a Company Share Option Plan (CSOP). This is another form of tax-advantaged share plan that can be utilised by larger businesses. It is not uncommon for businesses to move from an EMI to CSOP plan as they expand but it is important to be aware if there are still any individuals with unexercised EMI options. This is because the individual limit which applies to EMI options will also take account of any CSOP options issued. This is likely to be more relevant as companies that previously outgrew their EMI plan and then started to grant CSOP options are now, following the Autumn 2025 Budget, back in the scope of EMI plans.

Also, if CSOP options are issued and the total number of tax-advantaged options held by an employee exceeds the individual EMI threshold, this will count as a disqualifying event for the EMI options and they must then be exercised within 90 days or risk losing their tax-advantaged status. Businesses must therefore continue to check both plans to ensure that EMI options are able to achieve their aim of rewarding employees in a tax efficient manner.

Notification deadline and ongoing reporting

When a business grants EMI options, HMRC must be notified. If these were granted on or after 6 April 2024, the deadline for notification is 6 July following the end of the relevant tax year. EMI grants which are not notified to HMRC by this deadline will likely lose their tax-advantaged status.

As well as initial notification, an annual return to HMRC is required for EMI options. The deadline for this is 6 July following the end of the relevant tax year and can be done using the HMRC online portal.

Although the budget announced that from April 2027 the notification requirement will be removed, these still apply in the meantime and annual reporting will continue to be required. It is important that businesses adhere to this requirement to ensure that they, and their employees, see the full benefit.

Changes to EMI Terms

During the life of the EMI plan a business may wish to amend the terms – for example to remove a performance condition that is now deemed impossible or to amend the circumstances for exercise. There is a risk, however, that any amendment to the terms of an EMI option may also lead to the loss of the tax-advantaged status. Changes may be permitted but decisions on this are based on individual circumstances. Again, this is an area where taking advice in advance can be helpful.

Help is available

While there are a number of mistakes to avoid in operating an EMI plan, these are easily avoided with a little care. Seeking professional advice from share plan experts can help you avoid these mistakes and provide peace of mind.

At Shepherd and Wedderburn, our Employee Share Incentives team are here to help you at every step of the EMI process. From helping design the EMI plan that meets the needs of your business, to working through the statutory requirements, drafting the legal documents, assisting with the HMRC reporting, and being there to support through the life of the option plan (with all the ‘what ifs’ that can arise), our team have extensive experience in helping businesses navigate the process. To find out more and prevent your business falling into one of these pitfalls you can reach out to one of Shepherd and Wedderburn’s dedicated share plan specialists. If businesses do not qualify for EMI options for any reason then we can provide guidance on other available alternatives to consider for their share incentive needs.

This article was co-authored by Trainee Erin Casey.

Contributors: