For ambitious UK companies looking to attract, motivate, and retain key talent, equity-based incentives are an increasingly popular tool. Among the most commonly used methods for rewarding and aligning employees with business success are Enterprise Management Incentive (EMI) schemes and growth shares. Both offer a way to provide staff with a stake in the business, but they operate in different ways, come with different tax implications, and are suited to different business needs.
Understanding the difference between EMI options and growth shares is crucial to selecting the most effective strategy for your company’s goals. Whether you’re an early-stage startup planning for fast growth or an established business considering your next phase of expansion, getting this choice right can significantly impact your financial efficiency, employee satisfaction, and future exit strategy.
What Are EMI Share Options?
EMI (Enterprise Management Incentive) schemes are a government-backed share option plan designed specifically for smaller, high-growth UK companies. They allow businesses to grant share options to selected employees with significant tax advantages. Under an EMI scheme, employees are granted the right, but not the obligation, to buy shares in the company at a set price (usually the current market value) at a future date.
One of the biggest advantages of EMI options is their tax efficiency. When structured correctly, employees will typically pay only 10% Capital Gains Tax on any gains when they sell their shares, assuming they meet certain conditions. There is no Income Tax or National Insurance liability on the grant or exercise of the options, provided the exercise price equals the market value at the time of grant.
From the employer’s perspective, EMI schemes are relatively flexible. You can select specific employees, set performance conditions, and determine vesting periods. There are eligibility requirements, such as having gross assets of no more than £30 million and employing fewer than 250 people. But for companies that meet the criteria, EMIs are one of the most tax-efficient and motivating ways to share ownership.
What Are Growth Shares?
Growth shares, on the other hand, involve issuing a special class of shares that only participate in the future increase in the company’s value, above a certain hurdle. These shares typically do not carry rights to existing value at the time they are granted, making them appealing from a valuation and tax perspective. They are often structured to benefit employees only when the company is sold or reaches a certain valuation threshold.
With growth shares, employees become shareholders immediately upon receiving the shares, although their value may initially be very low. Since the shares have limited participation rights until certain targets are met, they are often considered to have minimal upfront value, which can result in low or negligible tax charges when issued.
For employees, the main benefit is the potential for a substantial capital gain if the company grows and reaches a liquidity event. Unlike EMI options, growth shares are taxed under standard capital gains tax rules, and while the 10% Business Asset Disposal Relief rate may apply in some cases, it is not as straightforward or guaranteed as it is under EMI schemes.
From the company’s perspective, growth shares can be useful when EMI is not an option—either due to the size of the business, the type of trade, or the desire to incentivise non-employees such as consultants or non-executive directors.
Comparing Flexibility and Practical Considerations
EMI options provide more structured flexibility when it comes to performance conditions, vesting schedules, and exit strategies. They can be tailored with detailed provisions for forfeiture, leaver provisions, and change-of-control events. Since EMI is a well-established, HMRC-approved scheme, it also provides clarity and confidence to both employers and employees.
Growth shares, while more flexible in design, tend to require greater upfront legal structuring and shareholder consent. They can be more complex to explain to employees, particularly in terms of understanding participation thresholds, share rights, and potential dilution. However, they are a powerful tool for aligning interests when structured well and can be particularly appealing in businesses with clear growth trajectories or exit plans.
From a practical standpoint, EMI schemes are easier to implement when companies have a clear and stable share structure. Growth shares may be more suitable for companies that already have multiple share classes or are looking to avoid option dilution on existing shareholders.
Tax Implications: What You Need to Know
Tax is often the deciding factor when weighing EMI against growth shares. EMI schemes carry considerable tax benefits, including the ability to fix the exercise price at the current market value, resulting in no Income Tax or National Insurance liabilities when the options are exercised.
Growth shares, while also potentially offering Capital Gains Tax treatment, may be subject to Income Tax at the point of issue if not structured carefully. Valuations play a key role here, and expert advice is essential to ensure compliance and to avoid unnecessary tax exposure.
One potential downside of growth shares is that they can complicate your company’s capital structure, particularly at the point of sale or during fundraising rounds. EMI options, in contrast, tend to be more straightforward for potential buyers and investors to understand and price into a deal.
Which Is Right for Your Business?
The decision between EMI and growth shares depends on a range of factors, including your company’s size, goals, trade type, and employee profile. If your business qualifies for EMI and you’re looking to incentivise key employees in a tax-efficient way, EMI options are often the preferred route. They are HMRC-approved, well understood, and generally offer the best tax treatment for both the company and the recipient.
However, if your business falls outside the EMI eligibility criteria, or you want to incentivise non-employees, growth shares can be an effective alternative. They can also be used alongside EMI schemes in certain situations, allowing you to tailor your incentive structure to different groups within the business.
Getting this decision right is essential. Poorly designed schemes can lead to tax complications, employee dissatisfaction, or problems during fundraising or exit. A carefully considered and professionally implemented equity incentive plan can help you attract and retain top talent, drive performance, and align your team with your long-term business goals.
Let Us Help You Choose the Right Path
At Williamson & Croft, we specialise in designing and implementing both EMI schemes and growth share structures for businesses across a wide range of sectors.
Whether you’re launching a new incentive plan or reviewing an existing one, our team can guide you through every step, from eligibility checks and share valuations to legal structuring and ongoing compliance.
Ready to create a smart, tax-efficient incentive strategy for your team?
Contact us today to book a free consultation with one of our expert advisers. Let’s build an equity plan that rewards success, supports growth, and strengthens your business from the inside out.