Attracting, retaining and motivating key employees can be challenging, particularly for growing private companies competing with larger businesses, and offering employees an opportunity to share in the future success of the company can be a powerful incentive.
By Gianluca Pin, Tax Assistant Manager
Attracting, retaining and motivating key employees can be challenging, particularly for growing private companies competing with larger businesses, and offering employees an opportunity to share in the future success of the company can be a powerful incentive.
A carefully designed arrangement can help a company:
- recruit and retain key employees;
- align employees with the company’s long-term objectives;
- reward individuals for helping to increase shareholder value;
- preserve cash by supplementing remuneration with equity incentives;
- support management succession; and
- incentivise employees ahead of a future sale
Two arrangements commonly considered are Enterprise Management Incentive options, usually known as EMI options, and growth shares.
Although both can help align employees’ interests with those of the existing shareholders, they work in different ways and can have very different tax, valuation and commercial consequences.
Below, we answer some of the most common questions about EMI options and growth shares.
What are EMI share options?
An EMI arrangement allows a qualifying company to grant selected employees an option to acquire shares at a future date.
It is important to clarify that the employee does not normally become a shareholder when the option is granted, but instead the option gives them the right to acquire shares later, subject to the conditions set by the company.
Those conditions might include:
- remaining employed for a specified period;
- achieving agreed performance targets;
- the company reaching a particular value; or
- the sale of the company.
EMI arrangements are flexible, and companies can decide which qualifying employees receive options, how many options they receive, the exercise price and the conditions that must be met before the options can be exercised. A common structure is an “exit-only” EMI plan, under which the employee exercises the option shortly before, or as part of, a sale of the company.
Which companies can qualify for EMI?
From 6 April 2026, most companies must meet a number of conditions, including having:
- gross assets of no more than £120 million;
- fewer than 500 full-time employees; and
- a permanent establishment in the UK.
The company must also be independent and must generally carry on a qualifying trade. Certain activities are excluded, including banking, farming, property development, the provision of legal services and shipbuilding.
Where the EMI company is part of a group, the relevant conditions must be considered across the qualifying group. The company’s activities and any substantial non-trading or excluded activities therefore need to be examined carefully.
With the new limits that apply from 6 April 2026 more growing companies can now consider EMI.
Which employees can receive EMI options?
The employee must satisfy the statutory working-time requirement.
They must generally work for the company, or a qualifying group company, for at least:
- 25 hours per week; or
- if less, 75% of their total working time.
An employee can hold unexercised EMI options over shares with a value of up to £250,000, measured by reference to their market value when the options are granted, within a three-year period.
There are also restrictions affecting employees who already have a material interest in the company. Eligibility should therefore be checked before options are granted.
How are EMI options taxed?
Provided all the relevant conditions are met, there is normally no Income Tax or National Insurance contribution charge when an EMI option is granted.
There should also normally be no Income Tax or National Insurance charge when the option is exercised if the employee pays at least the market value of the shares at the date the option was granted.
If an option is granted at a discount, an Income Tax charge may arise when it is exercised.
Disqualifying events, changes to the option terms or a delay in exercising following a disqualifying event may also affect the favourable treatment.
When the employee eventually sells the shares, any increase in value is generally within the Capital Gains Tax regime rather than being treated entirely as employment income.
Shares acquired through a qualifying EMI option may also qualify for Business Asset Disposal Relief if the relevant conditions are met. In particular, the disposal must normally take place at least two years after the EMI option was granted, and the company and employment conditions must be satisfied throughout the relevant period.
The usual 5% personal-company shareholding test does not have to be met for qualifying EMI shares.
What are growth shares?
Growth shares are a separate class of shares designed to allow employees or directors to participate in the future growth of a business.
Unlike EMI options, the individual will normally acquire the growth shares when the arrangement is introduced and will therefore become a shareholder at that point. The rights attached to the growth shares are usually limited so that they only participate in value above an agreed threshold, sometimes referred to as a “hurdle”.
For example, if a company is currently worth £5 million, growth shares could be designed to participate only in value created above a £5 million hurdle. Because the shares have no right to the existing £5 million of value, they may have only nil or negligible value when issued, subject to a proper valuation of their rights and the company’s growth prospects.
The existing shareholders retain the benefit of the company’s current value, while the growth shareholder benefits only if the business grows beyond the agreed hurdle. If the company does not grow beyond that hurdle, the employee will have no growth value in which to share and may receive nothing on a sale.
The precise economic rights must be set out in the company’s articles of association. These might cover rights to capital on a sale, dividends, voting, transfers and what happens when the employee leaves.
How are growth shares taxed?
Growth shares acquired because of an individual’s employment will normally fall within the employment-related securities rules.
The initial tax position depends heavily on the market value of the shares when they are acquired, and the amount paid by the employee.
If the employee pays less than the relevant market value, the difference may be treated as employment income. Depending on the circumstances and whether the shares are readily convertible assets, Income Tax and possibly National Insurance contributions could arise.
Growth shares also commonly contain restrictions. For example, they may carry limited voting or dividend rights, participate only above a hurdle or be subject to compulsory transfer if the employee leaves.
Where restricted shares are involved, the company and employee should consider whether a joint election under section 431 of the Income Tax (Earnings and Pensions) Act 2003 is appropriate. Broadly, such an election can prevent future growth attributable to lifting restrictions from being charged to Income Tax, but it can also increase the amount treated as employment income when the shares are acquired.
If the employee pays the appropriate market value and the employment-related securities rules are properly addressed, future increases in value may generally fall within the Capital Gains Tax regime when the shares are sold.
It is important to note that growth shares will not automatically benefit from the special Business Asset Disposal Relief rules applying to qualifying EMI shares. The ordinary Business Asset Disposal Relief conditions would need to be considered separately.
What is the main difference between EMI options and growth shares?
The main difference is the point at which the employee acquires the shares.
With an EMI arrangement, the employee initially receives an option. They become a shareholder only when that option is exercised.
With growth shares, the employee normally acquires the shares at the outset and becomes a shareholder immediately, although the shares may have limited economic and voting rights.
EMI is a statutory tax-advantaged share option regime whereas Growth shares are not a separate tax-advantaged regime. Their tax treatment depends on the general employment-related securities legislation, the amount paid for the shares, their market value and the rights and restrictions attached to them.
EMI options
Potential advantages include:
- favourable tax treatment where the conditions are met;
- no immediate requirement for the employee to purchase shares;
- flexibility over vesting and performance conditions;
- the possibility of an exit-only arrangement;
- potential access to Business Asset Disposal Relief without meeting the usual 5% shareholding requirement; and
- the ability to agree a valuation with HMRC.
Potential disadvantages include:
- detailed company, employee and option qualification requirements;
- excluded trading activities;
- the risk of disqualifying events;
- ongoing reporting and compliance obligations; and
- the need for careful legal drafting and administration.
Growth shares
Potential advantages include:
- participation can be limited to future growth;
- the existing value of the company can be protected for current shareholders;
- the arrangement can be tailored to the company’s commercial objectives;
- they may be available where EMI cannot be used; and
- employees become shareholders from the outset.
Potential disadvantages include:
- they do not benefit from a standalone statutory tax-advantaged regime;
- valuation can be complex;
- employment-related securities charges must be considered;
- amendments to the articles of association will normally be required;
- the employee becomes a shareholder immediately; and
- leaver, voting, dividend and transfer provisions require careful drafting.
Can a company use both EMI options and growth shares?
Yes. A company may use more than one type of incentive arrangement for different categories of employees.
For example, EMI options might be granted to employees who satisfy the qualifying conditions, while growth shares or another arrangement might be considered for individuals who are not eligible for EMI.
However, the different arrangements must work together. Companies should consider the potential dilution of existing shareholders, interaction between share classes, dividend and capital rights and the order in which shareholders participate in sale proceeds.
What happens if an employee leaves?
This will depend on the plan rules, option agreement, articles of association and any shareholders’ agreement.
A distinction is often made between “good leavers” and “bad leavers”. A good leaver could include someone leaving because of ill health, redundancy, retirement or death. A bad leaver might include an employee who resigns before a specified date or is dismissed for misconduct.
For EMI options, the documents should explain whether unvested options lapse, whether vested options can still be exercised and the period within which any exercise must take place.
For growth shares, the articles or shareholders’ agreement may require the employee to transfer their shares when they leave. The price payable could depend on their leaver status.
These provisions require careful legal drafting. They should also be reviewed from a tax perspective before the arrangement is implemented.
What happens if the company is sold?
On a sale, an employee holding EMI options may be able to exercise those options and sell the resulting shares as part of the same transaction.
If the employee already holds growth shares, the amount they receive will depend on the rights attached to those shares and whether the sale value exceeds the hurdle.
For example, assume that a company is currently worth £5 million and growth shares are entitled to 10% of the value above a £5 million hurdle. If the company is later sold for £8 million, the growth in value above the hurdle is £3 million and, subject to the detailed rights and any other adjustments, the growth shares would participate in £300,000 of that additional value.
If the company were sold for £5 million or less, the hurdle would not be exceeded, and the growth shareholders would receive nothing in respect of that growth participation.
This is a simplified example. In practice, the calculation may need to account for debt, surplus cash, transaction costs, preference rights, different share classes and the detailed definition of sale proceeds in the articles.
Final thoughts
EMI options and growth shares can both be effective ways to reward key employees and align them with the future success of a company.
EMI can offer significant tax advantages for qualifying companies and employees. Growth shares can provide additional flexibility, particularly where the existing shareholders want employees to benefit only from value created after the shares are introduced. The best arrangement will depend on the company, its shareholders, its employees and its long-term plans. Taking advice before any shares or options are issued can help avoid unexpected tax charges and ensure the arrangement delivers the intended commercial result.
How can UHY Ross Brooke help?
We can help you decide whether EMI options, growth shares or a combination of the two is appropriate for your business. This includes considering eligibility, the intended commercial outcome, the tax implications and the value and rights of the relevant shares, while working alongside your legal advisers to ensure the arrangement is implemented and reported correctly.
Employee share arrangements work best when the commercial terms, tax treatment, valuation and legal documentation are considered together from the outset.
Please get in touch if you would like to discuss whether EMI options, growth shares or a combination of the two may be suitable for your business.
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