EMI options, from qualifying to exit
An EMI scheme is the most tax-efficient way to give your employees a stake in the company. It is also the easiest to get wrong, and almost never for interesting reasons - a qualifying test failed at the outset, a valuation nobody agreed with HMRC, a deadline missed by a fortnight. This is the whole arc, from working out whether you qualify through to the day someone finally exercises. If you only want to know what an EMI scheme actually is, start with What is an EMI share option scheme? instead.
- The company limits rose sharply on 6 April 2026 - gross assets to £120m, the employee cap to 500, the company-wide option limit to £6m. Companies told they were too big a few years ago are frequently eligible now.
- Two separate valuations do two different jobs. Actual market value sets the exercise price and keeps income tax away; unrestricted market value measures your limits.
- One deadline decides whether the scheme works at all. Grants must be notified to HMRC by 6 July following the end of the tax year of grant, and missing it costs the tax treatment.
- Growing past the size limits does not disqualify options already granted. Those tests apply at grant; the seven statutory disqualifying events are a different list entirely.
- Held two years from grant, the gain can attract Business Asset Disposal Relief at 18% rather than income tax at 40% or more. On a real exit that difference is the whole point of the exercise.
Most companies qualify, and far more do now
EMI is deliberately aimed at smaller, independent trading companies, and the tests are applied to the company at the point options are granted. There are four of them.
- Size. Gross assets of no more than £120 million.
- Headcount. Fewer than 500 full-time equivalent employees.
- Independence. The company must not be a 51% subsidiary of, or otherwise controlled by, another company.
- Trade. It must carry on a qualifying trade, wholly or mainly in the UK.
Those first two numbers changed on 6 April 2026, and they changed a lot. Gross assets went from £30 million to £120 million, the employee cap from 250 to 500, and the total value of unexercised options a company may have outstanding from £3 million to £6 million. If somebody told you in 2023 the company had outgrown EMI, that advice was right then and may well be wrong now. It is worth a second look before you reach for anything more complicated, and if you genuinely do not qualify, EMI vs CSOP covers the nearest alternative. One carve-out: Northern Ireland companies trading in goods or electricity keep the previous £30 million and £3 million limits.
The trade test is where most genuine failures happen, because a long list of activities is excluded - property development, financial services, leasing, farming, running hotels or nursing homes, and, with some irony, providing legal or accountancy services. The rule bites where excluded activities form a substantial part of what the company does, so a mixed business needs looking at properly rather than assumed either way.
Who can hold them, and how much
The company qualifying is only half of it. Each person receiving options has to qualify too, and the requirement catches people founders assume are fine.
An option holder must be an employee or a director of the company or a qualifying subsidiary, and must commit at least 25 hours a week to the business or, if they work fewer hours than that, at least 75% of their total working time. Total working time means all their remunerative work, employment and self-employment together. So a non-executive director attending four board meetings a year does not qualify. Nor does a genuine contractor, for the simpler reason they are not an employee at all. Both are common assumptions and both are wrong.
Anyone with a material interest of more than 30% of the company is also excluded, which occasionally catches a founder trying to include themselves.
Then the limits. An individual can hold up to £250,000 of unexercised EMI options measured over a three-year period, and the company as a whole up to £6 million. Both are measured by unrestricted market value at the date of grant, which is the second of the two valuations covered in the next stage. If you are still deciding between structures rather than implementing one, employee share schemes explained sets EMI against the alternatives.
Everything else at this stage is design rather than eligibility, and it is where the scheme is actually built: the vesting schedule, usually three or four years with a one-year cliff; the exercise price; whether vesting is linked to performance; what happens when someone leaves; and the events on which options can be exercised at all.
Two numbers, and each does a job
Share valuation is the part founders most want to skip and the part which most often decides whether the scheme delivers what was promised. There are two values, and confusing them is the standard mistake.
Actual market value is what the shares are worth taking account of the restrictions attached to them - the fact they cannot easily be sold, carry no control, and are subject to whatever the articles impose. It is the lower number, and it matters because setting the exercise price at or above AMV is what keeps income tax out of the picture when the option is exercised.
Unrestricted market value ignores those restrictions and asks what the shares would fetch without them. It is the higher number, and it is the one measuring both the £250,000 individual limit and the £6 million company limit.
You can ask HMRC to agree both before granting, and it is worth doing. An agreed valuation removes the argument later, when the numbers are real and the stakes are higher. HMRC's agreement holds for 90 days from the date of its letter, provided nothing material changes in the meantime, so approach them when you are ready to grant rather than months ahead. Miss the window and you need a fresh valuation.
One deadline, and it is unforgiving
This is the stage which most often destroys a scheme, because it is administrative and nobody feels urgency about administration.
Two things have to happen. First the scheme is registered with HMRC through the employment related securities online service. Then every grant of options must be notified. For options granted on or after 6 April 2024, the notification deadline is 6 July following the end of the tax year in which the option was granted. Options granted before that date ran on the old rule of 92 days from grant, which is worth remembering if you are reviewing a legacy scheme.
The extended deadline is more generous than the old one, and it has made people relaxed about a rule which has not become any softer. An option not notified in time is simply not a qualifying EMI option. The tax advantages are gone, for the company and for the employee, and there is no discretion to reach for.
After that the scheme has an annual obligation for as long as it is registered: an ERS return each year by 6 July, including a nil return in a year when nothing happened. Late returns attract automatic penalties which escalate, and a forgotten registration quietly generating penalties is a common way for this to surface years later.
Vesting, leaving, and the day it pays
A scheme granted is a scheme you now have to run, usually for years, through changes nobody anticipated when it was drafted.
Most SME schemes are exit-only, meaning options become exercisable on a sale of the company and not before. That is a deliberate choice, not a default: it keeps the cap table clean and means nobody has to find cash for shares they cannot sell. The trade-off is worth saying out loud to the team - if there is never an exit, the options never pay.
Vesting sits underneath that, typically over three or four years with a one-year cliff, so someone leaving in month eleven takes nothing. Leaver provisions decide what happens to vested and unvested options when people go, and the good leaver and bad leaver definitions are the clauses which matter most and get read least.
Options now have up to 15 years to be exercised, extended from 10 on 6 April 2026, and existing options can be amended to take advantage of the longer window. Then, at exit, the point of all of it. How that exit is structured is its own subject, covered in the guide to selling a business.
10,000 shares
Granted at £1, the agreed market value
Sold at £11
Gain of £100,000
No income tax on exercise. The whole gain is a capital gain, and after two years from grant it qualifies for Business Asset Disposal Relief at 18%.
Keeps £82,00010,000 shares
Granted at £1, the same market value
Sold at £11
Gain of £100,000
The £100,000 is taxed as employment income on exercise - income tax at 40% plus employee National Insurance. The company pays employer NICs on top.
Keeps £58,000Illustrative only, and simplified. Assumes a higher-rate taxpayer, options granted at market value, Business Asset Disposal Relief available and within the £1 million lifetime limit, and ignores the annual exempt amount. Your figures will differ.
That gap is the entire commercial case for doing this properly, and it is why the stages before this one matter. Every one of them - the qualifying tests, the valuation, the deadline - exists to protect the left-hand column.
The scheme that quietly stopped working
EMI schemes rarely fail loudly. They stop qualifying somewhere along the way and nobody notices until an exit is being negotiated and the buyer's advisers start reading.
The legislation sets out seven disqualifying events: the company losing its independence, the company ceasing to meet the trading activities requirement, the employee ceasing to be eligible, changes to the terms of the option, an alteration to the company's share capital, a conversion of shares, and the grant of a CSOP option taking the holder over the £250,000 limit. Where one occurs, the option must be exercised within 90 days to keep the full relief.
Worth knowing what is not on that list. Growing past the gross assets or employee limits does not disqualify options already granted - those tests apply at the point of grant. A successful company does not lose the benefit of the options it has issued by becoming successful. It simply cannot grant new EMI options once it no longer qualifies, which is a different and much more manageable problem.
The rest of what goes wrong is not statutory at all. A valuation used months after it expired. An annual return nobody filed. Option terms varied informally by email to keep somebody happy. Each is avoidable and each is expensive to unpick with a deal on the table.
Silva sets these schemes up as a fixed-fee package - five documents, drafted by a specialist barrister, project managed by us, and typically delivered in three to four weeks from quote to final pack. Indicative figures are on the pricing page. We also review schemes somebody else put in, which is usually a shorter conversation and occasionally a considerable relief.
Frequently asked questions
Does my company qualify for an EMI scheme?
From 6 April 2026 a company generally qualifies if it has gross assets of no more than £120 million, fewer than 500 full-time equivalent employees, is independent of another company's control, and carries on a qualifying trade wholly or mainly in the UK. Those limits rose substantially on that date, so a company told a few years ago it was too big is worth re-checking. Property development, financial services and legal or accountancy services are among the excluded activities.
Can directors have EMI options?
Yes, provided they meet the working time requirement - at least 25 hours a week for the company, or at least 75% of their total working time if they work fewer hours than that. That means an executive director will usually qualify and a non-executive director attending occasional board meetings will not. Anyone with a material interest of more than 30% of the company is excluded regardless of hours.
Do I need HMRC to agree the EMI valuation?
You are not obliged to, but it is strongly advisable and standard practice. An agreed valuation removes the risk of HMRC challenging the exercise price later, which is when the amounts are real. HMRC's agreement is valid for 90 days from the date of its letter, provided nothing material changes, so ask when you are ready to grant rather than well in advance.
How long does it take to set up an EMI scheme?
A straightforward scheme takes around three to four weeks from instruction to a completed document pack, with the HMRC valuation usually the longest single element. Silva delivers a full scheme - Scheme Rules, Option Agreement, Board Minutes, Draft Exercise Notice and the HMRC correspondence - at a fixed fee, drafted by a specialist barrister.
What happens to EMI options when the company is sold?
It depends on how the scheme was drafted. Most SME schemes are exit-only, so options become exercisable on a sale and holders exercise and sell in the same transaction, taking cash rather than shares. Where options are already exercisable, holders may exercise before completion. Unvested options usually lapse unless the scheme provides for acceleration, which is a drafting choice made at the outset.
What is a disqualifying event for EMI options?
One of seven statutory events which stop an option qualifying from that point: loss of independence, the company ceasing to meet the trading activities requirement, the employee ceasing to be eligible, changes to the option's terms, an alteration to share capital, a conversion of shares, or a CSOP grant taking the holder over the £250,000 limit. The option must be exercised within 90 days of the event to keep full relief. Exceeding the gross assets or employee limits later is not a disqualifying event.
Get the scheme in, properly
Most of what goes wrong with EMI is avoidable at the drafting stage and expensive afterwards. Silva puts schemes in at a fixed fee, barrister-drafted, and will tell you honestly if EMI is not the right structure for your company rather than selling you one anyway.