Setting Up an EMI Share Option Scheme for Your UK Startup Team

An EMI share option scheme in the UK is the most tax-efficient way for a small company to give its team a stake in the business. Enterprise Management Incentives, to give the scheme its full name, let a qualifying company grant employees options to buy shares later at a price fixed today, with tax treatment no other arrangement can match. For a startup that cannot compete with corporate salaries, an EMI scheme is often the single most powerful tool for attracting and keeping the people who will build the company.

This guide explains who qualifies, the limits that apply, how the tax works, and the practical steps to set a scheme up and keep it valid with HMRC.

What is an EMI scheme and why startups use it

An option is a right to buy shares in the future at a price agreed now, known as the exercise or strike price. Employees earn their options over time, usually across a four-year vesting period, and only pay to buy the shares when there is a reason to, typically a sale of the company. Because the price is fixed at grant, everything the shares gain in value afterwards flows to the employee.

EMI beats ordinary (unapproved) options because of the tax. With a standard option, the growth in value between grant and exercise is taxed as income, at rates up to 45 per cent plus National Insurance. With EMI, granted correctly, that charge disappears. That difference is why almost every venture-backed UK startup runs an EMI pool.

Does your company qualify?

EMI is aimed squarely at smaller, independent trading companies. To grant options your company must meet all of the following.

Gross assets of no more than £30 million. From 6 April 2026 this rises to £120 million.
Fewer than 250 full-time equivalent employees at the date of grant. From 6 April 2026 this rises to fewer than 500.
Independent, meaning not more than 50 per cent controlled by another company.
Carrying on a qualifying trade. Most trades qualify, but some are excluded, including banking and finance, property development, farming, legal and accountancy services, and shipbuilding.
A permanent establishment in the UK.

The total value of unexercised EMI options across the whole company cannot exceed £3 million at any time.

Which employees qualify?

To hold EMI options an individual must be an employee (or a full-time director) who works at least 25 hours a week for the company, or, if less, at least 75 per cent of their total working time. They must also not already hold more than 30 per cent of the company’s shares. Each employee can hold options over shares worth up to £250,000, measured at grant, in any three-year period. Non-executive directors, consultants and contractors cannot take part, which catches many founders out.

How the tax works

This is where EMI earns its reputation.

On grant: no tax to pay.
On exercise: if the options were granted at or above the market value the shares had at grant, there is no income tax and no National Insurance to pay when the employee buys the shares. If they were granted at a discount, income tax is due only on that discount.
On sale: the employee pays Capital Gains Tax on the growth. EMI shares can qualify for Business Asset Disposal Relief, which reduces the CGT rate, provided the options were held for at least two years before the sale. That relief rate rose from 10 per cent to 14 per cent on 6 April 2025 and is set to reach 18 per cent from 6 April 2026, so it is less generous than it once was but still worth having.

To lock in the no-income-tax outcome, you agree the market value of your shares with HMRC before you grant, using a valuation. HMRC will formally agree it, and that agreed figure holds for a set period, which removes the guesswork from the strike price.

How to set up an EMI scheme

Check eligibility for the company, the shares and each employee against the rules above.
Agree a valuation with HMRC. Submit a valuation of the shares and get HMRC’s agreement in writing before granting.
Design the terms. Decide the size of the option pool, the vesting schedule (four years with a one-year cliff is the common pattern) and the events that let people exercise, usually a sale.
Grant the options with a signed option agreement for each employee, setting out the number of shares, the exercise price and the conditions.
Register and notify HMRC. Register the scheme through the company’s Government Gateway account and notify each grant.

Keeping the scheme valid: the HMRC deadlines

The rules on notifying HMRC changed recently and getting the timing wrong can cost the tax relief. For options granted on or after 6 April 2024, you must notify HMRC of the grant by 6 July following the end of the tax year in which it was granted. This replaced the old rule that gave you 92 days from the date of grant, which still applies to older grants. On top of that, every company operating a scheme must file an annual Employment Related Securities return by 6 July each year, even in a year with no activity. Miss the notification and the options can lose their EMI status, so put the date in the calendar the moment you grant.

Frequently asked questions

How much does an EMI scheme cost to set up?

Legal and valuation fees for a straightforward scheme typically run to a few thousand pounds. The registration and annual returns to HMRC are free to file. The cost is small against the tax saved and the recruiting power gained.

Can a founder receive EMI options?

Yes, provided they are an employee or full-time director meeting the 25-hour or 75 per cent working-time test and do not already own more than 30 per cent of the company. Founders who hold large stakes usually cannot use EMI for those shares.

What happens to EMI options if an employee leaves?

That depends on the scheme rules. Most schemes treat leavers as either “good” or “bad”: a good leaver may keep vested options for a window, while unvested options usually lapse. The option agreement should spell this out clearly before anyone signs.

Do EMI options dilute the founders?

Yes. When options are exercised, new shares are issued and everyone’s percentage falls. Founders plan for this by setting aside an option pool, commonly 10 to 15 per cent of the company, before a funding round rather than after.

Is EMI better than giving employees shares directly?

For most startups, yes. Giving shares outright creates an immediate tax charge on their value and hands over voting rights straight away. EMI options defer the cost, keep the shares with the company until an exit, and carry far better tax treatment.

An EMI scheme is one of the few genuine advantages UK founders have when hiring against better-funded rivals. Set it up early, keep the HMRC deadlines, and it becomes a quiet engine for recruiting and retention. For more on building and funding a company, see the guides on the Idea London homepage, and check the current rules on the GOV.UK EMI page before you grant.