Differences between EMI and Unapproved Share Option schemes

14 July 2023

In this blog, we will be looking at the differences between EMI and Unapproved Share Option schemes and help you decide which one suits your company more.

advice : Employment and Tax

The share option schemes are a popular way for companies to incentivize and reward their employees. Two commonly used schemes in the UK are the Enterprise Management Incentive (EMI) scheme and the Unapproved Share Option scheme

Whilst both of these schemes grant share options to employees, there are some significant differences between them. That involves eligibility criteria, tax implications and other important factors. 

In this blog, we will be looking at those differences that will help you to decide which scheme is the best option for your company.

Eligibility criteria

The eligibility criteria for EMI and Unapproved Share Option schemes differ significantly. 

The EMI scheme is specifically designed for small and medium-sized enterprises (SMEs) and provides tax advantages for both the company and its employees. To qualify, a company must have gross assets of no more than £30 million and fewer than 250 full-time employees. 

The Unapproved Share Option scheme has no specific eligibility requirements and can be utilized by any company, regardless of its size or sector.

Tax treatment

The tax treatment between these two schemes also varies greatly. 

Under the EMI scheme, qualifying employees are granted share options with favourable tax treatment. There is generally no income tax or national insurance contributions (NICs) due on the grant or exercise of EMI options, provided they are granted at market value. However, capital gains tax (CGT) may apply when the shares acquired through EMI options are sold. The rate of CGT will depend on the individual’s tax bracket at the time of disposal.

In contrast, the Unapproved Share Option scheme does not benefit from the same tax advantages as the EMI scheme. When options are granted under this scheme, there is no income tax or NICs payable at that time. However, income tax and potentially NICs will be due when the options are exercised, based on the difference between the market value of the shares at the time of exercise and the exercise price. In addition, when the shares are sold, CGT may apply again, depending on the individual’s tax bracket.

Share ownership and control

Another difference is the level of flexibility these schemes offer in terms of share ownership and control. 

In an EMI scheme, the company can set various conditions for the exercise and sale of options, such as vesting periods and performance targets. This allows the company to align the interests of the employees with the long-term success of the business. 

The Unapproved Share Option scheme provides more freedom to the employees in terms of when they exercise and sell their options. This flexibility may be appealing to some employees, but it also means that the company has less control over the timing and conditions of share ownership.

Reporting and Administration 

Lastly, some differences exist in the process of reporting and administration requirements for these schemes.

Once registered, The EMI scheme requires the company to submit an annual return to HMRC each tax year, detailing EMI activity such as the exercises of EMI options. Separately, where EMI options are granted, a grant notification will also need to be submitted to HMRC. This helps HMRC ensure that the scheme is being operated within the relevant legislation.

Where the company operates an unapproved share option scheme for their UK employees, it must be registered with HMRC once a reportable event takes place for the first time, such as a grant of unapproved options.

Once the scheme is registered an annual return will be required for each tax year regardless of whether any reportable activity has taken place or not.

As you can see, the EMI and Unapproved Share Option schemes differ significantly in several areas. The EMI scheme is specifically designed for SMEs and offers favourable tax treatment, therefore, is considered the favourite. The Unapproved Share Option scheme can be used by any company but unfortunately, lacks the same tax advantages. 

If you are looking for some support with your share option scheme, please get in touch with our Tax experts who will be delighted to help you with the implementation.

The information available on this page is of a general nature and is not intended to provide specific advice to any individuals or entities. We work hard to ensure this information is accurate at the time of publishing, although there is no guarantee that such information is accurate at the time you read this. We recommend individuals and companies seek professional advice on their circumstances and matters.