Reviewed by the Legal Foundations editorial team. Last updated: March 2026.

EMI Share Options: The Complete Guide for UK Startups

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You’re trying to hire senior engineers, a head of product, a finance lead. You can’t match what a well-funded competitor — or a large tech company — can pay. You’re not alone. This is the situation almost every early-stage UK startup finds itself in.

The answer most UK founders reach for is equity. But handing out shares directly creates tax problems. And generic unapproved share options are a poor substitute — employees end up paying income tax and National Insurance on the gains, which wipes out much of the benefit.

EMI share options are different. They’re purpose-built for exactly this situation — a government-backed scheme designed to let startups compete for talent by offering equity with a tax treatment that actually makes sense. When structured correctly, employees pay capital gains tax at 10% when they sell, rather than income tax and NICs on the full gain. That difference is enormous. This guide explains everything you need to know: whether you and your employees qualify, how the tax works, how to set a scheme up, and when to use a lawyer versus a platform.

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What Is an EMI Scheme?

EMI stands for Enterprise Management Incentive. It’s a government-approved share option scheme for small and medium-sized UK companies, legislated under the Employment-Related Securities (ERS) legislation and the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), Schedule 5.

An option is a right — not an obligation — to buy shares in the future at a price fixed today. Under an EMI scheme, the company grants an employee the option to buy shares at a set price (the exercise price, usually the market value at the date of grant). If the company grows and is sold or floated, the employee exercises their options, buys shares at the old price, and immediately benefits from the difference.

The reason EMI is the gold standard for UK startups — rather than unapproved options, growth shares, or simply gifting shares — comes down almost entirely to tax. Under an unapproved scheme, employees pay income tax and National Insurance Contributions on any gain at exercise. Under EMI, if the exercise price equals the market value at grant, there’s no income tax and no NICs on exercise at all. The gain is treated as a capital gain, not income, and qualifies for Business Asset Disposal Relief (BADR) at 10%.

For a ESOP guide comparing the full range of employee equity options in the UK, see our detailed breakdown. For most tech and SaaS startups, EMI is the right answer.

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Does Your Company Qualify for EMI?

Before setting anything up, check whether your company meets the qualification criteria. The rules are set out in ITEPA 2003, Schedule 5.

Company requirements:

• Must be a trading company (not a holding company with purely passive investments)
• Gross assets must be less than £30 million
• Fewer than 250 full-time equivalent employees
• UK tax resident
• Must not be a 51% subsidiary of another company

Excluded trades:

Certain types of businesses are excluded from EMI, regardless of their size. These include banking, financial services, insurance, leasing, farming, forestry, property development, hotels and guest houses, nursing homes, and — notably — legal and accountancy services.

This last point is worth flagging: a law firm or accountancy practice cannot run an EMI scheme for its own employees. This is a common source of confusion. However, it has no bearing on clients of those firms — a SaaS company, a tech startup, a consumer app — these businesses can generally use EMI freely.

The disqualifying event problem:

EMI status can be lost. Events that can disqualify your company from EMI include: the company being acquired (becoming a 51% subsidiary), gross assets exceeding £30 million, employee headcount exceeding 250, or the company changing its trade to an excluded activity. Options already granted before a disqualifying event retain their EMI status for 90 days after the event. After that, they become unapproved options.

This matters because disqualifying events can be triggered by fundraising rounds — particularly if a large corporate investor takes a majority stake. Your lawyers should check this before any significant investment.

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Do Your Employees Qualify for EMI?

Even if the company qualifies, not every employee can receive EMI options. There are individual eligibility tests.

Working time requirement:

The employee must either work at least 25 hours per week for the company, or — if they work fewer than 25 hours — at least 75% of their total working time must be spent working for the company. This catches part-time employees who have other jobs. If someone works 10 hours a week for you and 30 hours a week elsewhere, they don’t qualify.

Shareholding limit:

The employee must not already hold more than 30% of the company’s share capital. This rule is aimed at preventing significant shareholders from using the scheme to convert income into capital. It’s rarely an issue for standard hires, but it can be relevant for co-founders who didn’t join the cap table as employees.

Employees only — not consultants:

This is one of the most common mistakes founders make. EMI options can only be granted to employees — people employed under a contract of employment. Contractors, consultants, and self-employed freelancers don’t qualify, regardless of how integral they are to the business. If you want to incentivise a key consultant, unapproved options or growth shares are the alternatives.

Grant limits:

• Maximum per employee: options over shares worth up to £250,000 (at the date of grant)
• Maximum outstanding per company: options over shares worth up to £3 million in aggregate at any time

These limits apply to the market value of the shares at the time of grant, not at exercise. Once options have been exercised or lapsed, the headroom frees up again.

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How EMI Options Are Taxed

The tax treatment is what makes EMI valuable. Here’s how it works at each stage.

On grant: nothing

When you grant an EMI option to an employee, there is no income tax and no NICs. No tax event occurs at grant.

On exercise: depends on the exercise price

When the employee exercises their options (buys the shares), the tax treatment depends on whether the exercise price equals the agreed market value at grant:

• Exercise price = market value at grant: No income tax, no NICs. The employee buys the shares at the agreed price with no tax consequence.
• Exercise price < market value at grant: The discount (the difference between the exercise price and the market value at grant) is treated as employment income and subject to income tax and NICs. This arises where options are granted at a discount — it can be intentional but it reduces the tax advantage.

On sale: the big win

When the employee sells their shares, any gain is subject to Capital Gains Tax. Under EMI, if:
– The employee has held the options (or shares from exercising) for at least 2 years from the date of grant, and
– They have been a qualifying employee for at least 2 years

…they qualify for Business Asset Disposal Relief (BADR), which reduces the CGT rate to 10%.

Compare this to unapproved options, where the full gain at exercise is subject to income tax at 40% or 45% (for higher or additional rate taxpayers), plus NICs. The difference — between 10% and 45%+ — is why EMI is the default choice for UK startups.

A note on BADR:

BADR (formerly Entrepreneurs’ Relief) is a CGT relief that applies to qualifying disposals. For EMI, the two-year holding period runs from the date of option grant, not from the date of exercise or share issue. This matters for planning — employees who receive options and exercise them promptly still need to have held the options for two years to benefit from the 10% rate.

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The HMRC EMI Valuation

Before you can grant EMI options, you must agree the market value of the shares with HMRC. This is a mandatory step — you cannot simply state a value yourself.

How valuations work:

HMRC agrees the value of the class of shares being optioned. For early-stage startups with ordinary shares only, this is usually the value of the company divided by the number of shares, possibly adjusted downward. You (or your lawyer) submit a valuation to HMRC’s Shares and Assets Valuation (SAV) team for agreement.

Arguing for a discount:

It’s standard practice to argue for an Unrestricted Market Value (UMV) discount — a reduction in the agreed value to reflect the fact that startup shares are illiquid, not publicly traded, and subject to dilution. This discount can be meaningful. A £5m company on paper might see EMI shares agreed at a fraction of that on a per-share basis, which determines the exercise price employees pay. A lower agreed value means employees benefit more on exit.

Timing matters enormously:

The agreed valuation reflects the company at the time of the application. If you’ve just closed a £2m seed round at a £10m valuation, that becomes the benchmark. If you apply before that round closes, you may agree a much lower value. Set up your EMI scheme before you raise if you can — it’s one of the most valuable planning opportunities in the startup toolkit.

Turnaround and validity:

HMRC currently takes approximately 2–4 weeks to agree a valuation, though this varies. Once agreed, the valuation is valid for 90 days — you must grant the options within 90 days of the agreement date. If you miss this window, you need a new valuation.

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Setting Up an EMI Scheme — What’s Involved

Setting up an EMI scheme involves five steps. Each matters, and errors at any stage can create problems down the line.

Step 1: Board Resolution to Adopt the Scheme

The directors must formally resolve to adopt the EMI option plan. This is documented in board minutes and establishes the authority under which options will be granted.

Step 2: Draft the EMI Option Plan Rules

The plan rules are the master document that governs the entire scheme. They set out the terms on which options can be granted, how vesting works, what happens on a leaver event, what triggers acceleration, and how options interact with exits. This is where most of the important decisions are made — and where a badly drafted document creates problems years later.

Step 3: Agree the HMRC Valuation

Submit the valuation application to HMRC SAV and obtain agreement. Include supporting information: recent accounts, details of any fundraising, comparator transactions if relevant.

Step 4: Grant Individual Option Agreements

Once the valuation is agreed, grant individual option agreements to each employee receiving options. These are signed documents between the company and the employee, setting out the number of options, exercise price, vesting schedule, and leaver provisions. Each employee receives their own agreement.

Step 5: Notify HMRC — The 92-Day Rule

This step is critical and frequently missed. After granting EMI options, you must notify HMRC within 92 days of the date of grant. Notification is done via the Employment-Related Securities (ERS) annual return system online.

What happens if you miss the 92-day deadline?

The options lose their EMI status and become unapproved options. The tax advantages disappear — the employee will face income tax and NICs on exercise. This is an expensive and entirely avoidable mistake. If you’re running the scheme yourself and you’re not certain about the deadline, this is the single biggest risk.

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Vesting Schedules and Good/Bad Leaver Provisions

How options vest — and what happens when an employee leaves — are the two most contentious areas of any EMI scheme. Get these right at the outset.

Standard startup vesting:

The market standard for UK startups is a 4-year vest with a 1-year cliff. This means:

• No options vest during the first 12 months (the cliff)
• After 12 months, 25% of the options vest in one go (or the proportion earned over the cliff period)
• The remaining 75% vest monthly over the following 36 months

Why the cliff exists:

The cliff protects the company if an employee leaves quickly. Without a cliff, someone could join, receive options, and leave after two months with a small but real equity stake in the business. The cliff ensures that someone has to demonstrate real commitment — a year of solid work — before they earn anything.

Acceleration:

Most EMI schemes include acceleration provisions. On a qualifying exit event — typically a trade sale or IPO — all unvested options immediately vest in full. This ensures employees benefit from a successful exit regardless of where they are in their vesting schedule at the time. Without acceleration, an employee in their first year at the time of a sale would receive nothing, which is not the intent.

Good leaver vs bad leaver:

This distinction determines what happens to options when someone leaves the company.

• Good leaver (typically: redundancy, ill health, death, or leaving at the company’s request without cause): usually retains their vested options, which they can exercise within a set period (often 90 days or up to the option expiry date).
• Bad leaver (typically: resignation, dismissal for cause, breach of contract): usually forfeits all unvested options, and may also lose vested options depending on the scheme rules.

The definitions of “good leaver” and “bad leaver” are heavily negotiated. The leaver provisions in the plan rules determine how much leverage the company has in departure situations — and how fair the outcome is for employees. These provisions deserve careful thought.

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EMI vs SeedLegals — Do You Need a Platform or a Lawyer?

There are two main routes for setting up an EMI scheme: a platform like SeedLegals, or instructing a startup lawyer directly.

SeedLegals:

SeedLegals offers EMI scheme management as part of its annual subscription, currently priced at approximately £2,490/year. The platform generates the plan rules, option agreements, board minutes, and HMRC notification documentation. It’s designed to be self-service.

A startup lawyer:

A specialist startup lawyer will typically charge £1,500–£3,000 for a straightforward EMI scheme instruction — a one-time fee, not annual. They’ll advise on scheme structure, draft bespoke plan rules, handle the HMRC valuation submission, and ensure the scheme is correctly integrated with your existing cap table and shareholder arrangements.

What’s the real difference?

Platforms generate documents. Lawyers advise on whether those documents are right for your situation. A platform can’t tell you:

• Whether your leaver provisions will create a dispute risk in two years
• How your EMI scheme interacts with your existing preference share stack
• Whether a US-based employee might inadvertently trigger tax consequences
• Whether your planned fundraising round will create a disqualifying event

When the platform is adequate:

If you have a straightforward scheme — one or two employees, standard vesting, no unusual share structures, no imminent fundraising round — SeedLegals is a reasonable choice. The documents are solid, the process is guided, and the price is fair.

When to use a lawyer:

Use a lawyer for anything more complex: multiple share classes, employees with unusual employment arrangements, a scheme that needs to work alongside a funding round, US employees or dual-tax situations, or where the leaver provisions need to reflect a specific situation.

Speak to a startup lawyer about setting up your EMI scheme → Startup Legal Hub

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Frequently Asked Questions

How much does an EMI scheme cost to set up?

Legal fees for a straightforward EMI scheme run to approximately £1,500–£3,000 from a startup specialist. SeedLegals charges around £2,490/year for EMI scheme management as part of its platform. The legal fee is a one-time cost; SeedLegals is annual.

Can all employees be on an EMI scheme?

No. Employees must meet the working time test (25+ hours/week, or 75%+ of their working time). Consultants and contractors don’t qualify. Employees who already hold more than 30% of the company don’t qualify. Anyone receiving options valued above £250,000 at grant exceeds the individual limit.

What happens to EMI options when a company is sold?

Most EMI plan rules include acceleration on exit — all unvested options vest immediately on a qualifying sale. Employees then either exercise their options (usually funded from the sale proceeds) or, in some structures, the acquirer satisfies the options directly. The exact mechanics depend on the deal structure and the plan rules.

Is there a limit to how many EMI options a company can grant?

Yes. The company can have no more than £3 million worth of EMI options outstanding at any one time (valued at the time of grant). Each individual employee can receive no more than £250,000 worth of options at grant. These are aggregate limits — options that have been exercised or lapsed don’t count.

What if my company no longer qualifies for EMI?

If a disqualifying event occurs, options already granted retain their EMI status for 90 days after the event. Options exercised within that 90-day window are treated as EMI options for tax purposes. After 90 days, they become unapproved options. Options granted after a disqualifying event cannot be EMI options.

Do I need a solicitor to set up an EMI scheme?

There is no legal requirement to use a solicitor. However, the consequences of errors — losing EMI status through a missed HMRC notification, poorly drafted leaver provisions that create disputes, or a scheme that doesn’t work alongside your existing share structure — are significant and expensive to fix. For anything beyond the simplest scheme, proper legal advice is worth the cost.

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Ready to set up your EMI scheme? The structure matters, the timing matters, and the details matter. Speak to a startup lawyer who does this every day.

Speak to a startup lawyer

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Related guides:
– ESOP guide
– UK Startup Fundraising Guide
– Free Cap Table Template
– Free Founders Agreement