Rewarding Employees with Shares – A Tax-Efficient Approach Using EMI Schemes
Many business owners want to reward and retain key employees by offering them shares in the company. While this can be highly motivating, the way shares are awarded can have significant tax consequences. In this article, we explore the tax treatment of employee share awards and explain why Enterprise Management Incentive (EMI) schemes are often the most tax-efficient solution.
Share Awards Outside a Registered EMI Scheme
Where shares are gifted to an employee, or sold at undervalue, outside a registered EMI scheme, the employee is generally subject to income tax on the value of the shares received. If the employee pays some consideration for the shares, this amount is deducted from the value subject to PAYE.
Readily Convertible Assets (RCAs)
Shares are classed as readily convertible assets (RCAs) if:
They are traded on a recognised stock exchange, or
There is an arrangement in place that allows the employee to sell the shares for cash.
If the shares are RCAs:
Income tax must be deducted through PAYE (please note - PAYE deductions are capped at 50% of the employee’s pay, meaning any excess tax due may need to be collected over multiple payroll periods)
National Insurance Contributions (NICs) are payable by both the employer and the employee
Non-Readily Convertible Assets
If the shares are not RCAs:
No National Insurance is payable
The employer does not need to operate PAYE
Instead, the employee must report the income tax charge via their Self Assessment tax return
Although this approach is sometimes not thought of as a “scheme”, it is known as a non tax-advantaged share scheme. Employers are still required to report all reportable events to HMRC, including the acquisition of shares by employees.
Why Enterprise Management Incentives (EMI) Are More Tax-Efficient
Enterprise Management Incentive (EMI) schemes are one of the most generous tax-advantaged share schemes available in the UK and are specifically designed to help smaller, growing companies attract and retain talent.
Company Requirements
To qualify, a company must:
Have fewer than 250 employees (rising to 500 from 2026)
Have gross assets of £30 million or less
Be an independent company
Certain trades are prohibited, including financial activities, legal services, farming and property development.
Employee Requirements
Employees must:
Work at least 25 hours per week or 75% of their working time for the company
Be a genuine employee or director
Not own more than 30% of the company’s shares
Key Features
EMI options can be offered to selected employees – they do not need to be available to everyone
Each individual can hold EMI options over shares worth up to £250,000 (based on market value at grant) within a three-year period
Options must generally be exercised within 10 years to retain favourable tax treatment
Tax Treatment of EMI Schemes
One of the key benefits of EMI schemes is their favourable tax treatment:
No tax is due when the option is granted
No income tax or NICs on exercise, provided the exercise price is at least equal to the market value at the date of grant
If options are granted at a discount, income tax is charged on the lower of:
The market value at grant, or
The market value at exercise,
less the price paid by the employee
When the employee later sells the shares, Capital Gains Tax (CGT) will apply to the gain, calculated as:
Sale proceeds
- minus the amount paid for the shares
- minus any amount already charged to income tax
In many cases, employees may also benefit from Business Asset Disposal Relief, reducing the CGT rate further.
Overall, EMI schemes are an extremely tax-efficient way to reward key employees when structured and implemented correctly.
HMRC Registration – A Critical Step
To qualify for EMI tax advantages, the scheme must be registered with HMRC within the required time limits. Failure to do so can result in the scheme being treated as non tax-advantaged, with significantly higher tax costs for both the employer and employee.
You must notify HMRC:
Within 92 days of the date of grant for options granted before 6 April 2024
By 6 July following the end of the tax year in which the grant was made for options granted on or after 6 April 2024
Missing these deadlines can result in the loss of all tax benefits.
Contact Us | Expert Tax Advisors in Surrey
If you would like to explore how to reward your employees in a tax-efficient and compliant way, Surrey Hills Tax can help. We advise business owners and directors on the design, implementation, and HMRC registration of employee share schemes, including Enterprise Management Incentives (EMI). If you are considering rewarding key employees with shares or want to understand whether an EMI scheme is right for your business, get in touch with Surrey Hills Tax today to discuss your options.
Get in touch:
📧 hello@surreyhillstax.co.uk
📞 01483 970 410