What is an employee share scheme?

An employee share scheme is a scheme which gives employees the right to receive shares in the company they work for.

There are basically two types of employee share schemes. The first is called an ‘EMI Share Scheme’. EMI stands for Enterprise Management Incentives. The second type is a ‘non-EMI’ share scheme, which simply means any other type of scheme which doesn’t fall within the EMI rules.

Usually, an EMI Share Scheme is much more tax-effective for the employee, as there is no charge to income tax when the employee receives the share options or exercises the options and converts them into shares. Instead, an employee will usually only be charged capital gains tax (CGT) when they sell the shares (if he makes a profit on the sale).

By contrast, a non-EMI scheme requires the employee to pay income tax when he exercises his share option and to also pay capital gains tax too when he sells his shares. Income tax is usually charged at a much higher right than CGT, which may fall to 10% if the shares have been held for two years. So, it works out far better for the recipient to receive EMI options rather than non-EMI options.

In order to qualify for the EMI Scheme, the recipient of the shares needs to either be working full-time for the employer or working at least 75% of his time for the employer (or a minimum of 25 hours a week). Therefore, the EMI Scheme can’t be used to give share options to contractors or consultants.

There are also some types of employers who are prohibited from making use of an EMI Scheme, most notably business involved in land development and financial services. However, most online businesses, start-ups, and general trading companies will qualify.