EMI Share Options: The Complete UK Startup Guide

Note: in April 2026 a number of changes to the EMI rules came into effect. This article incorporates those changes, which are summarised in the Appendix

What is an EMI scheme?

EMI stands for Enterprise Management Incentive. It's a share option scheme created by HMRC specifically for UK-based startups and SMEs.

The core idea is simple. You grant an employee the option — meaning the right, not the obligation — to buy shares in your company at a price you agree today. If the company grows and the share price increases, the employee can buy at the original lower price and benefit from the increase. That increase is taxed far more favourably than a salary bonus or cash equivalent would be.

Three things make EMI different from other share option schemes:

No tax on grant. When you give someone EMI options, they don't owe anything- neither income tax nor National Insurance. Nothing happens until they choose to exercise those options, which might be years later.

Favourable tax on exercise. So long as the exercise price when the shares were originally granted is no lower than the market value at the time of grant, there's no income tax when the employee exercises either. They only pay Capital Gains Tax when they eventually sell the shares — and they may qualify for Business Asset Disposal Relief, which means a reduced CGT rate of 18% (from April 2026) rather than the standard 24% for higher-rate taxpayers.

Corporation Tax relief for the company. When an employee exercises their EMI options, the company can typically claim a Corporation Tax deduction equal to the difference between the exercise price and the market value of the shares at that point. In practical terms, the company gets a tax benefit when employees benefit — offsetting the cost of running the scheme.

EMI has been around since 2000 and is used by over 14,000 UK companies. It's the most popular tax-advantaged share option scheme in the country, and the April 2026 reforms have made it accessible to a much wider range of businesses.

Does your company qualify?

EMI has two layers of eligibility: the company must qualify, and each individual employee receiving options must also qualify. Let's take them in turn.

Your company must meet all of the following criteria at the time EMI options are granted:

Independence. Your company must not be a subsidiary of, or controlled by, another company. If you have a parent company that owns more than 50% of your shares, you don't qualify. This rule exists to keep EMI targeted at independent businesses rather than subsidiaries of larger groups. To be clear, however, if your "topco" meets the independence condition, then you CAN award EMI options in topco to employees of qualifying subsidiaries (see below).

Employee headcount. You must have fewer than 500 full-time equivalent employees (previously 250 — increased from April 2026). Part-time employees are counted proportionally.

Gross assets. Your company's total gross assets must not exceed £120m at the time options are granted (previously £30m). If you're part of a group, the combined gross assets of the group count. Be aware that this includes cash raised in funding rounds — a large Series B can push you over the threshold if you're close to the limit.

Qualifying trade. Your company must carry on a "qualifying trade" — meaning its main business activity must not be in one of the excluded categories. The list of excluded trades includes banking and financial services, insurance, legal services, accountancy, property development, farming, forestry, hotels and guest houses, nursing and residential care, and coal and steel production. If you run a technology company, a SaaS business, a manufacturing company, a consultancy (other than legal or accounting), or most other types of business, you're likely fine. Many FS businesses have also managed to get through - for example by evidencing that they broke insurance rather than writing insurance. But in this case you need to get specialist advice.

UK permanent establishment. Your company must have a permanent establishment in the UK. This doesn't mean all your employees need to be UK-based, but the company itself needs a genuine UK presence.

Subsidiary rules. If your company has subsidiaries, they must be "qualifying subsidiaries" — generally meaning your company owns at least 50% of them (90% for property management subsidiaries), and they also meet the trading and independence tests.

Watch out: Some companies fall into grey areas on the "qualifying trade" test. If a significant part of your revenue comes from an excluded activity — say your tech company also has a property development arm — you could fail the test even if your primary business qualifies. The test looks at whether a "substantial" part of your trade falls into excluded categories. HMRC doesn't define a precise percentage for "substantial" but guidance suggests anything above 20% of trading activity may be problematic. If you're unsure, get advice before setting up the scheme.

Do your employees qualify?

Each individual who receives EMI options must meet their own eligibility requirements:

Working time commitment. The employee must spend at least 25 hours per week, or at least 75% of their total working time (whichever is lower), working for your company (or a qualifying subsidiary). This is a rolling test — it needs to be satisfied at the date of grant and throughout the period the options remain unexercised. Part-time employees who don't meet this threshold can't receive EMI options (though they may be eligible for other schemes like CSOP or unapproved options).

Employment status. The recipient must be an employee or director of the company. Contractors, consultants, and advisors don't qualify for EMI, regardless of how many hours they work. The employment relationship needs to be genuine — HMRC can and does challenge arrangements where someone is technically an "employee" but is really operating as a contractor.

No material interest. The employee must not hold (alone or together with associates) a "material interest" in the company — defined as more than 30% of the ordinary share capital, or the right to more than 30% of the company's assets on a winding up. "Associates" includes close family members and certain trusts. In practice, this means that co-founders who own large stakes may not be eligible for EMI options. If you and your co-founder each own 40% of the company, neither of you can receive EMI options.

A common question: "Can I grant EMI options to someone who's already a shareholder?" Yes, as long as their total interest (existing shares plus options) doesn't breach the 30% threshold. An employee who owns 5% and receives options over another 10% is fine. An employee whose total interest would exceed 30% is not.

Is EMI right for your company? A decision framework

EMI is the most popular scheme for good reason, but it isn't always the right choice. Here's a framework to help you decide.

Start here: Do you meet the basic eligibility criteria?

If your company is independent, has fewer than 500 employees, gross assets under £120m, carries on a qualifying trade, and has a UK permanent establishment — you pass the first gate. If not, EMI isn't available to you. Look at CSOP (for tax-advantaged options with higher thresholds), growth shares or unapproved options instead.

Next: Who are you granting options to?

If they're UK-based employees working at least 25 hours per week (or 75% of their time), EMI works. If they're contractors, advisors, non-executive directors who don't meet the working time test, or employees based overseas, you'll need an alternative such as growth shares or unapproved options for them. Many companies run EMI alongside an unapproved scheme to cover everyone.

Then: What are you trying to achieve?

If you want maximum tax efficiency for your team, EMI is almost always the best option. No tax on grant, potentially no tax on exercise, and CGT at 18% (with BADR) on sale. No other UK share option scheme matches this.

If you want to avoid dilution entirely, consider phantom equity or cash-based long-term incentive plans instead. EMI options will eventually convert to real shares, which means dilution for existing shareholders.

If you want simplicity and speed above all else, unapproved options are faster to set up (no HMRC valuation needed, no eligibility hoops). But the tax treatment for employees is significantly worse.

If your company is pre-revenue or very early stage, EMI still works — but think carefully about the HMRC valuation process and whether the administrative overhead is justified when you only have one or two hires. For very early companies, you may be able to argue that the shares have no value meaning the employees can simply purchase them for their nominal value (effectively free) - simpler initially, with a plan to introduce EMI once you're scaling the team.

Finally: Are you prepared for the ongoing administration?

EMI isn't "set and forget." You need to file annual returns, track vesting schedules, maintain share scheme records, and manage exercises and leavers. If you're going to run an EMI scheme, you need a system for managing it — whether that's dedicated software, a specialist advisor, or both.

How EMI options are taxed

Tax treatment is the main reason EMI exists. Here's what happens at each stage of the option lifecycle.

At grant: nothing

When you grant EMI options to an employee, there is no tax charge — provided the exercise price is set at or above the agreed market value (AMV) of the shares at the date of grant. No income tax. No National Insurance Contributions (NICs). This is true regardless of how valuable the options might become.

If you set the exercise price below the AMV (a "discounted" option), income tax will apply on the discount element when the options are exercised. Some companies deliberately set a discounted exercise price to make the options more attractive, accepting that there'll be a tax charge on exercise. This is a legitimate design choice, but it needs to be made consciously.

At exercise: usually nothing (if set up correctly)

When the employee exercises their options — buying shares at the agreed exercise price — there is typically no income tax or NICs to pay, as long as:

• The exercise price was set at or above the AMV at grant

• No "disqualifying event" has occurred since grant (more on this below)

• The options are exercised within 15 years of grant (previously 10 years, extended from April 2026)

If a disqualifying event has occurred, the options lose their EMI tax-advantaged status from that date. Any growth in value from the disqualifying event onwards is taxed as employment income (income tax + NICs) rather than as a capital gain.

At sale: Capital Gains Tax

When the employee sells their shares — typically during an exit, acquisition, or secondary sale — they pay Capital Gains Tax on the gain (sale price minus exercise price).

From 6 April 2026, if the employee qualifies for Business Asset Disposal Relief (BADR), the CGT rate is 18%. This is significantly lower than the standard higher-rate CGT rate of 24%.

The only requirements for BADR on EMI shares are:

• The EMI options must have been granted at least 24 months before the shares are sold. Note: the clock starts at the grant date, not when the employee exercises. This means even exit-only schemes — where the employee exercises minutes before a sale — qualify for BADR, as long as the options were originally granted at least two years earlier.

• The employee must have been an employee or director of the company (or a group company) throughout that period.

• The company must be a trading company (or holding company of a trading group).

If BADR doesn't apply, standard CGT rates kick in: 18% for basic-rate taxpayers and 24% for higher/additional-rate taxpayers, after the annual CGT exemption (currently £3,000).

Corporation Tax relief for the company

When employees exercise EMI options, the company can typically claim a Corporation Tax deduction. The deduction equals the difference between the market value of the shares at exercise and the exercise price paid. In other words, HMRC taxes the company as if the cost of the employee's discount on the share price were an expense to the company — a useful offset against the cost of equity dilution.

Key takeaway on tax: The ideal EMI outcome is: zero tax on grant → zero tax on exercise → 18% CGT on sale. This requires the exercise price to be set at AMV, no disqualifying events, and a holding period of at least 24 months. Every deviation from this path increases the tax bill for someone.

The HMRC valuation: getting your share price agreed

Before you can grant EMI options, you need to establish the market value of your company's shares. While it's not legally required to get HMRC to agree your valuation in advance, it is strongly recommended. Without pre-agreement, you're taking the risk that HMRC might later challenge your valuation and argue the exercise price was set too low — which would mean income tax charges for your employees and potentially invalidate the tax advantages of the entire scheme.

How the valuation process works

You (or your advisor) prepare a valuation report and submit it to HMRC along with a VAL231 form. The valuation should set out the Actual Market Value (AMV) and Unrestricted Market Value (UMV) of the shares.

AMV is the price a willing buyer would pay for the shares on the open market, taking into account any restrictions attached to them (minority discount, lack of marketability, etc.). This is typically the exercise price you'll set.

UMV is the value of the shares without any restrictions — used to calculate whether you're within the £250,000 per-employee and £6m per-company limits.

HMRC typically responds within four to six weeks, though it can take longer. They may accept your valuation, reject it, or come back with questions. The negotiation process is usually collaborative rather than adversarial.

Practical tips on valuations

Timing matters. Your HMRC-agreed valuation is valid for 90 days from approval (potentially extendable to 120 days with a written request). You must grant options within this window. Companies normally grant options to employees in batches. If someone becomes eligible for options shortly after the last batch, you would normally inform them about the future grant, but hold off on the paperwork until your next batch (which would coincide with your next valuation).

Lower is usually better. Unlike a fundraising valuation (where you want a high number), an EMI valuation is one of the few situations where a lower number benefits everyone. A lower AMV means a lower exercise price, which means more upside for employees and a larger Corporation Tax deduction for the company. The valuation methodology for EMI purposes is different from a fundraising valuation — it accounts for minority discounts, lack of marketability, and other factors that reduce the per-share value.

Post-funding rounds are tricky. If you've just completed a funding round at a high valuation, HMRC will be aware of that price point. You can still argue for a lower EMI valuation (because an institutional investor with information rights, board seats, and liquidation preferences is paying for different things than a minority employee shareholder with basic ordinary shares), but the gap needs to be justifiable.

Setting up your EMI scheme: the process

Setting up an EMI scheme involves several steps. Here they are in order, along with what's actually happening at each stage.

Step 1: Board resolution. Draft scheme rules. The EMI option plan rules set out the framework for your scheme: who can receive options, how vesting works, what happens on exercise, how leavers are treated, and what constitutes an exit event. These rules need to be compliant with EMI legislation, so they're typically drafted by a lawyer or generated by a specialist platform.

Step 2: Your board passes a resolution to adopt the EMI option plan. This is a formal corporate action — you'll need board minutes recording the decision.

Step 3: HMRC valuation. As described above, submit your valuation report and VAL231 form. Wait for HMRC approval.

Step 4: Grant options. Once your valuation is approved, you grant options to individual employees by issuing them option agreements. Each agreement specifies the number of options, exercise price, vesting schedule, and other terms. This must happen within 90 days of the HMRC valuation being agreed.

Step 5: HMRC notification. For options granted before 6 April 2027, you must notify HMRC of each grant. Since April 2024, this notification is included in the annual return (filed by 6 July each year) rather than being a separate filing within 92 days. From April 2027, the notification requirement is removed entirely.

Step 6: NIC Transfer Agreement. You may want to put an NIC Transfer Agreement in place. This is an agreement between the employer and employee that any NICs that would otherwise fall on the employer (in the event the options lose their EMI status) will instead be borne by the employee. HMRC needs to approve this election. It's not mandatory, but it protects the company from unexpected employer NIC costs. Most companies don't bother with this since they expect that the options will retain their EMI status anyway, in which case no NIC will be due.

On timelines: From first decision to first grant, a straightforward EMI setup typically takes 8–12 weeks. The biggest variable is the HMRC valuation response time. You can prepare scheme rules, board resolutions, and option agreements in parallel with the valuation submission to save time.

Designing your vesting schedule

The vesting schedule determines when an employee's options become exercisable. This is one of the most important design decisions in your scheme, and it's worth thinking through carefully.

Time-based vesting

The most common structure in UK startups is four-year vesting with a one-year cliff. Here's how it works:

• Year 1 (the cliff): No options vest during the first 12 months. If the employee leaves before the one-year mark, they forfeit all their options. The cliff exists to protect the company from granting equity to someone who leaves after a few months.

• Years 2–4 (monthly vesting): After the cliff, 25% of options vest immediately (i.e. the first 12 months' worth), and the rest vest monthly in equal instalments over the remaining three years. By the end of year four, 100% of the options have vested.

Some companies use a three-year schedule instead of four, particularly for more senior hires. Others use annual vesting (25% per year) rather than monthly, which is simpler to administer but creates "vesting cliffs" each year.

Performance-based vesting

You can attach performance conditions to vesting instead of (or in addition to) time-based conditions. Common performance triggers include:

• Company revenue reaching a specific threshold

• The company achieving a target valuation

• Individual KPIs being met

• Product milestones being delivered

Performance conditions make your scheme more targeted but also more complex. They need to be genuinely measurable and objectively verifiable. Vague conditions like "significant contribution to the business" will cause problems. HMRC is also cautious about conditions that give the board too much discretion over when or whether options vest — excessive board discretion can jeopardise EMI status.

Exit-only vesting

Under an exit-only structure, options only become exercisable when a qualifying exit event occurs (typically a trade sale, acquisition, or IPO). Employees may accumulate vested options over their service period, but they can't exercise them until an exit happens.

Exit-only schemes are popular with companies working towards a specific sale or IPO. They align incentives around the exit event and avoid the administrative complexity of employees exercising options during the life of the business. However, they carry a risk: if no exit happens (or it takes much longer than expected), employees hold options they can never use, which can be demotivating.

Tips for getting vesting right

Match the vesting period to the role. A four-year schedule suits most employees. For very senior hires, consider accelerated vesting or a shorter overall period. For advisors (who'd need unapproved options rather than EMI), six months to two years is more typical.

Think about what happens on change of control. If the company is acquired, do unvested options accelerate? Fully or partially? Your scheme rules should specify this clearly. "Single trigger" acceleration (all options vest on acquisition) is generous to employees but can complicate deal negotiations. "Double trigger" (options only accelerate if the employee is also terminated within a period after acquisition) is more common in later-stage companies.

Be clear about leaver treatment from day one. The vesting schedule and the leaver provisions are closely linked — see the next section.

Exercise: what happens when employees buy their shares

When an employee exercises their EMI options, they're using their right to buy shares at the exercise price. Here's what's involved.

When can employees exercise?

This depends on your scheme rules. The most common structures are:

• After vesting, at any time. The employee can exercise vested options whenever they choose, without waiting for a specific event. This gives employees maximum flexibility but creates administrative complexity for the company (you may end up with many small shareholders).

• On exit only. Options can only be exercised on a qualifying exit event. Simpler for the company, but limits employee flexibility.

• On leaving. Vested options must be exercised within a defined period (usually 90 days) after the employee leaves. This is important because EMI tax benefits only continue for 90 days after the employee stops meeting the employment conditions.

The exercise process

The employee notifies the company of their intent to exercise, pays the exercise price (either in cash or occasionally through cashless exercise mechanisms at an exit), and receives shares. The company needs to update its share register, issue share certificates if required, and file an SH01 form with Companies House within one month of the allotment.

What employees need to understand

When employees exercise EMI options, they become actual shareholders. This means they have voting rights (if the shares carry them), they're on the cap table, and they're visible on the share register and at Companies House. They should understand what class of shares they're receiving, what rights those shares carry, and how the shareholder agreement (if one exists) affects them.

Leaver provisions: good leavers, bad leavers, and everything in between

Leaver provisions are the part of EMI scheme design that founders most often get wrong — usually by not thinking about it until someone actually leaves. Your scheme rules should specify clearly what happens to options when an employee departs.

Unvested options

The standard position is that unvested options lapse when the employee leaves. They've haven't earned them yet, so they forfeit them. This is rarely controversial.

Vested but unexercised options

This is where it gets interesting. The approach typically depends on whether the person is classified as a "good leaver" or a "bad leaver."

Good leavers (usually defined as people who leave through no fault of their own — redundancy, ill health, retirement, or sometimes voluntary resignation) are typically allowed to retain their vested options and exercise them within a defined window after leaving. The standard window is 90 days, which also aligns with the EMI tax rules — if options aren't exercised within 90 days of leaving, they lose their EMI tax-advantaged status. Some schemes allow longer exercise windows (up to 15 years from grant), but the tax advantage is lost after 90 days, so the employee would face income tax and NICs on any gain from day 91 onwards.

Bad leavers (usually defined as people dismissed for gross misconduct, or sometimes those who resign voluntarily within a certain period) typically forfeit all their options — vested and unvested. This is a punitive provision, and it should be used carefully. Overly broad "bad leaver" definitions that catch people who simply resign create resentment and can make your scheme feel worthless to employees.

The grey area: ordinary leavers

Many schemes now include a third category — "ordinary leavers" — for people who resign voluntarily in normal circumstances. Ordinary leavers might keep a portion of their vested options, have a shorter exercise window than good leavers, or have their shares subject to compulsory transfer provisions at a price below market value.

Getting leaver provisions right

Be fair. If your leaver provisions are too aggressive, employees will view the options as worthless — because they'll assume they'll never actually benefit. The incentive effect of your scheme depends on employees believing the options have real value.

Be clear. Ambiguity in leaver provisions is a lawsuit waiting to happen. Define exactly who qualifies as each type of leaver, what happens to each category of options, and what timeframes apply. Don't leave it to "board discretion" — HMRC frowns on discretionary provisions in EMI schemes, and employees deserve certainty.

Be consistent. Apply the same leaver provisions to everyone. If you make exceptions for senior people, you create precedent problems and potential discrimination issues.

Document everything. When someone leaves, formally confirm their leaver status, the number of vested/unvested options, and the exercise deadline. This avoids disputes later.

EMI and fundraising: timing it right

If you're raising investment, the interaction between your funding round and your EMI scheme needs careful handling.

Before the round: lock in a lower valuation

The best time to get an HMRC EMI valuation is before you announce a funding round. Once you've agreed a round valuation with investors, HMRC will use that as a reference point, which typically means a higher AMV for your EMI options. A higher exercise price means less upside for employees.

If you can, submit your EMI valuation application before term sheets are signed. Your pre-round valuation will reflect the company's current state — pre-investment, pre-growth capital — which justifies a lower per-share price.

During the round: watch for disqualifying events

Certain events that commonly occur during fundraising can be "disqualifying events" for EMI purposes. These include changes in the company's share capital structure, changes of control, or the company ceasing to meet the independence test. If your funding round involves creating new share classes, issuing preference shares, or giving investors control rights, check whether any of these trigger a disqualifying event for existing EMI options.

After the round: be aware of new limits

If your fundraising round has pushed your gross assets above £120m (including the cash you've just raised), you may no longer be eligible to grant new EMI options — even though existing options remain valid. Similarly, if the round has resulted in your company being controlled by another entity (e.g., a majority investor), new EMI grants won't be possible.

Practical tip: If you know a funding round is coming, consider granting EMI options to your current team first, using a pre-round HMRC valuation. This locks in a lower exercise price and avoids any post-round eligibility complications.

Ongoing compliance and reporting

Running an EMI scheme comes with ongoing administrative obligations. Miss them, and your employees could lose their tax advantages.

Annual return (mandatory, every year)

Every company with a registered EMI scheme must file an annual return with HMRC by 6 July each year, covering the tax year that ended on the previous 5 April. For the 2025/26 tax year, the deadline is 6 July 2026.

You must file a return even if nothing happened during the year (a "nil return"). Late filing triggers an automatic £100 penalty, and continued non-compliance can result in further penalties and — critically — employees potentially losing the tax advantages of their options.

The return covers all "reportable events" during the tax year: options granted, options exercised, options lapsed, and any disqualifying events.

Notifications (until April 2027)

For options granted before 6 April 2027, companies must notify HMRC of each grant. Since April 2024, this notification is submitted as part of the annual return (rather than separately within 92 days). From April 2027, the notification requirement disappears entirely.

Record-keeping

You should maintain accurate, up-to-date records of all EMI option grants, vesting schedules, exercises, lapses, and leaver events. HMRC can enquire into your scheme at any time, and during due diligence for a funding round or exit, investors and acquirers will want to see a clean EMI paper trail.

Companies House filings

When employees exercise EMI options and new shares are allotted, you must file an SH01 (return of allotment of shares) with Companies House within one month. You also need to update your next confirmation statement to reflect the changed share capital.

Disqualifying events

Certain events can cause EMI options to lose their tax-advantaged status. When a disqualifying event occurs, the options don't become invalid — they just lose the special EMI tax treatment from that point forward. Any subsequent gain is taxed as employment income rather than a capital gain.

Common disqualifying events include: the company being taken over or ceasing to be independent, the company beginning to carry on excluded trade activities, a material change to the terms of the options without meeting HMRC requirements, and the employee ceasing to meet the working time commitment.

Common EMI mistakes and how to avoid them

Based on industry experience, these are common errors that trip up UK companies most often.

Missing the valuation window. Your HMRC-agreed valuation is valid for 90 days. If you don't grant options within that window, you need a new valuation. This sounds obvious, but it catches companies surprisingly often — particularly if internal approvals, board meetings, or option agreement negotiations take longer than expected. Build buffer time into your plan.

Setting the exercise price too low without understanding the tax consequences. Some founders set the exercise price at nominal value (say, £0.001 per share) to maximise employee upside. This is technically permitted, but it creates an income tax charge on exercise (on the difference between the nominal exercise price and the AMV at grant). Make sure employees understand what they're signing up for.

Failing to track disqualifying events. Companies undergo changes all the time — new share classes, new investors, shifts in trading activity. Each of these could be a disqualifying event for EMI. If you don't check, you might discover years later that your scheme lost its tax advantages without anyone realising.

Ignoring the 30% material interest rule. If a co-founder or early employee's total interest (shares plus options) exceeds 30%, their EMI options are invalid from the start. This needs to be checked at the time of each grant, not retroactively.

Not filing annual returns. Even a nil return must be filed by 6 July each year. A missed return can result in options losing their EMI status entirely, not just a financial penalty.

Vague leaver provisions. "The board will decide" is not a leaver provision. Employees need to know what happens to their options if they leave, and HMRC needs to see that the scheme operates consistently with its stated rules.

Granting to ineligible people. Contractors, part-time employees below the 25-hour threshold, and employees with material interests cannot receive EMI options. Granting them options anyway means those options will be treated as unapproved from day one, with much less favourable tax treatment.

EMI jargon buster

The world of share options has its own vocabulary. Here's a plain-English translation of the terms you'll encounter most often.

Actual Market Value (AMV): The price HMRC agrees a share is worth today, taking into account that it's a minority holding in a private company. This usually becomes your exercise price.

Business Asset Disposal Relief (BADR): A CGT relief that reduces the tax rate on qualifying gains. For EMI shares disposed of from April 2026, the BADR rate is 18%. Previously known as Entrepreneurs' Relief.

Cliff: A minimum service period (usually 12 months) before any options begin to vest. If the employee leaves during the cliff period, all options are forfeited.

Company Share Option Plan (CSOP): Another HMRC-approved share option scheme, with higher eligibility thresholds than EMI but less generous tax treatment. Often used by companies that don't qualify for EMI.

Disqualifying event: Any event that causes EMI options to lose their tax-advantaged status. Examples include the company being taken over, ceasing to be independent, or beginning an excluded trade activity.

Exercise: The act of an employee using their option to buy shares at the agreed exercise price.

Exercise price (or strike price): The price per share that the employee pays when they exercise their options. Usually set at the AMV agreed with HMRC at the time of grant.

Good leaver / bad leaver: Categories defined in the scheme rules that determine what happens to a departing employee's options. Definitions vary between schemes.

Grant: The formal act of giving an employee options. The grant date is important for tax calculations and reporting.

Growth shares: A class of shares with a "hurdle" — meaning the holder only benefits from value above a specified threshold. Not an option scheme, but sometimes used as an alternative to EMI.

Nil-paid or partly paid shares: Shares issued at nominal value where the full subscription price has not been paid. Not the same as options.

Option agreement: The legal document between the company and the employee setting out the specific terms of their option grant (number of options, exercise price, vesting schedule, exercise conditions).

Option plan (or scheme rules): The overarching document that sets the framework for the entire EMI scheme. Individual option agreements sit beneath this.

Option pool: The total number of shares set aside for future option grants. Typically expressed as a percentage of fully diluted share capital (10–20% is common in UK startups).

Phantom equity: A cash-based incentive that mirrors the economic effect of share options without issuing real shares. No actual ownership is transferred. Often used for international employees who can't receive EMI options.

Unrestricted Market Value (UMV): The value of shares ignoring any restrictions attached to them. Used to calculate whether you're within the £250,000 per-employee and £6m per-company EMI limits.

VAL231: The HMRC form used to submit an EMI share valuation for pre-approval.

Vesting: The process by which an employee's right to exercise their options becomes unconditional. Options "vest" over time (or on achievement of conditions).

Frequently asked questions

Can I grant EMI options to myself as a founder? Yes, as long as you meet the eligibility criteria — including the 30% material interest test. If you own more than 30% of the company, you're not eligible. Most founders of early-stage companies will fail this test.

Can I grant EMI options to non-UK employees? EMI is designed for UK employment relationships, and the company must have a UK permanent establishment. Employees don't need to be UK tax residents, but they do need to be employed by a UK company (or a qualifying subsidiary). For overseas team members who are employed by foreign entities, unapproved options or local equity plans are usually the right approach.

What happens to EMI options in an acquisition? This depends on your scheme rules. Typically, all vested options become exercisable immediately before the acquisition completes, and employees either exercise and sell, or their options are rolled over into equivalent options in the acquiring company. Unvested options may accelerate fully, partially, or lapse — your scheme rules should specify which.

Can employees sell their shares before an exit? They can, but finding a buyer for shares in a private company is difficult. Some schemes restrict share transfers (through the option agreement or shareholder agreement), and existing shareholders may have pre-emption rights. Secondary sales do happen, but they're the exception rather than the norm for most startups.

How many options should I grant to each employee? There's no single answer. The right number depends on the employee's role, seniority, stage of the company, and your overall option pool size. As a rough benchmark, early employees at seed-stage companies might receive 0.5–2% of fully diluted equity, while later hires at Series A+ companies might receive 0.1–0.5%. The individual limit is £250,000 in UMV per employee over a rolling three-year period.

What if my company outgrows EMI in the future? Existing EMI options remain valid even if the company subsequently exceeds the eligibility thresholds. You just can't grant new EMI options from that point. The April 2026 changes have significantly raised the ceilings, making this less likely for most growing companies.

Do I need a lawyer to set up an EMI scheme? You don't legally need one, but the complexity of EMI means professional advice is strongly recommended — whether from a specialist lawyer, an accountant experienced in share schemes, or a dedicated platform that handles the process. The cost of setting up a scheme incorrectly (lost tax advantages, disputed leaver provisions, HMRC challenges) far exceeds the cost of getting it right from the start.

How does EMI interact with SEIS/EIS? EMI options don't affect SEIS/EIS eligibility for investors — the two schemes operate independently. However, when EMI options are exercised and new shares are issued, this will change your company's cap table and share capital, which could affect ongoing SEIS/EIS calculations. The key point is that EMI options are over ordinary shares, and the existence of an option pool is generally factored into SEIS/EIS share valuations.

Appendix - The April 2026 changes: what's new

The Autumn Budget 2025 announced a significant expansion of the EMI scheme, with changes taking effect from 6 April 2026. If you looked into EMI before and concluded your company was too large, it's worth checking again.

Here's what changed:

Employee headcount limit: 250 → 500. Your company can now have up to 500 full-time equivalent employees and still qualify. This opens EMI to many scale-ups that had previously outgrown the scheme and been forced to use CSOP or unapproved options instead.

Gross assets limit: £30m → £120m. The ceiling on total gross assets has quadrupled. Companies that had hit the old £30m threshold — often quite early in their growth if they'd raised significant VC funding — can now qualify again.

Total option value limit: £3m → £6m. The maximum value of unexercised EMI options a company can have outstanding at any time has doubled. This matters for larger teams: if you're granting options to 50+ employees, the old £3m cap could be restrictive.

Maximum option lifespan: 10 → 15 years. EMI options can now remain unexercised for up to 15 years without losing their tax-advantaged status. This reflects the reality that companies are staying private longer. Crucially, this change can be applied retrospectively to existing unexercised options — you'll need to amend the relevant option agreements, but you can protect options that were approaching the old 10-year deadline.

From April 2027: no more grant notifications. Currently, companies must notify HMRC whenever they grant EMI options (this used to be within 92 days, now reported via annual returns for grants made from 6 April 2024). From April 2027, the separate notification requirement will be removed entirely. You'll still need to file annual returns, but the individual grant notification step disappears.

What this means in practice: If your company previously outgrew EMI and switched to CSOP or unapproved options, the April 2026 changes may mean you can switch back. Many companies in this position are expected to cancel their existing less-advantaged options and re-grant them as EMI. If this applies to you, speak to a share scheme specialist about the process — there are tax and accounting implications to get right.

The individual limit of £250,000 in EMI options per employee (based on unrestricted market value at grant) has not changed.