EMI Options Explained: A UK Founder's Guide to Tax-Advantaged Equity

Why founders care about EMI

Equity is the currency of early-stage hiring. You can't match Google's salary, but you can offer a meaningful stake in something the new hire helps build. The problem is that ordinary share options are taxed like a payslip: when the employee exercises, HMRC treats the gain as employment income and stings them with 40 or 45 percent tax plus 8 percent National Insurance, with the employer paying 15 percent secondary NIC on top.

EMI flips this. Granted properly, the employee pays nothing on the day the option lands, nothing on the day they exercise (provided the strike price is set at market value), and only Capital Gains Tax when the shares are eventually sold. That CGT goes through Business Asset Disposal Relief at 14 percent for the 2025/26 tax year, rising to 18 percent from 6 April 2026.

To put numbers on it: a developer who gets £100,000 of EMI gain at exit pays roughly £14,000 of tax in 2025/26. The same gain through an unapproved option could cost them £48,000 (40 percent Income Tax plus 8 percent NIC) and saddle the company with around £15,000 of employer's NIC. That £49,000 swing is the entire reason EMI exists.

The five numbers that decide everything

Before getting into the structure, fix these figures in your head. They drive every EMI conversation we have with founders.

The two limits at the top decide whether you can use EMI at all. The two at the bottom decide how many shares you can hand out once you're in. Founders mostly trip over the bottom right number first, the £3 million total. Most early-stage startups have nowhere near £3 million of share value, so they grant freely in the seed and Series A years, then suddenly find at Series B that one strong candidate hire would push them over.

Does your company qualify? The decision flow

HMRC publishes long lists of tests. In practice the qualification call comes down to six questions answered in order. If you can say yes to all six, you can grant EMI today.

The trade exclusions catch out more founders than the size limits

The gross assets and headcount tests are obvious. The trade test is where founders get blindsided. HMRC excludes a long list of activities from EMI. Some are intuitive (banking, insurance, legal services, accountancy). Others are less so: property development, farming and market gardening, operating or managing hotels and similar establishments, operating or managing nursing or residential care homes, hire purchase finance, leasing, and providing services to other companies in any of those excluded sectors.

Where this gets awkward: if more than 20 percent of your trade is in an excluded activity, the whole company fails the EMI test. So a software startup that pivots into providing booking software to hotels and starts taking a cut of the room revenue could find itself failing the trade test, even though the underlying business looks like a tech company. The test is "wholly or mainly" trading, which HMRC interprets as more than 80 percent of activity in qualifying trades.

If you're in any of the grey zones (legaltech, fintech with regulated wallet services, proptech that holds inventory, hospitality SaaS that takes commission revenue), get the trade test reviewed in writing before granting. We've seen one fintech client where the trade was clean at seed, drifted into excluded territory at Series A, and the disqualifying event quietly removed EMI status from every option already granted unless the holders exercised inside 90 days.

The £250,000 per-employee limit, and why it matters

Each employee can hold up to £250,000 worth of unexercised EMI options, measured at the AMV (Actual Market Value) on each grant date. If an employee already holds £200,000 of EMI options and you want to grant another £100,000 worth, only £50,000 of the new grant qualifies as EMI. The rest is treated as unapproved.

Two practical things to know. First, the £250,000 is per employee across all companies in the same group, so a founder who already received EMI at a previous startup and stayed under the lifetime cap can still receive a fresh £250,000 at your company (the limit is at-a-time, not cumulative). Second, exercised options no longer count toward the £250,000, which is why we sometimes coach founders to time exercises before fresh grants for senior hires.

The total company cap of £3 million has the same at-a-time logic. As your fair market value rises across funding rounds, the £3 million is consumed faster per share. A pre-seed company granting at £0.10 per share can issue 30 million share options under EMI; a Series B company granting at £15 per share gets just 200,000 options before the cap bites.

The HMRC valuation: why VAL231 matters

EMI's tax advantage hinges on one thing: the strike price the employee pays on exercise must be at least the AMV (Actual Market Value) of the shares on the grant date. If you get this right, exercise is tax-free. If you get it wrong, the difference between strike and AMV is taxed as employment income at 20, 40 or 45 percent plus NIC.

You don't have to use HMRC's valuation. But you should. The route is Form VAL231, submitted to HMRC's Shares and Assets Valuation team. They issue an agreed AMV that is binding for 90 days. Grant within that window and you have complete certainty. The valuation process typically takes 4 to 8 weeks at the moment, so plan ahead.

What we file in a VAL231 submission: latest annual accounts, the most recent share-issue documentation (so the last priced funding round), the cap table, the proposed option grants, a discount narrative explaining why a minority unmarketable holding is worth less than the most recent funding round price, and the company's growth and risk profile. The post-money valuation from your last round is the headline number, but the AMV on a minority illiquid holding is often 60 to 80 percent of that, especially at seed where the round is full of preference and anti-dilution protection that doesn't extend to ordinary shareholders.

The 6 July notification deadline (the new rule)

For options granted on or after 6 April 2024, the company must notify HMRC of the grant by 6 July following the end of the tax year in which the option was granted. The notification goes through the Employment Related Securities (ERS) online service, not by post.

This rule changed in 2024. Before April 2024, the deadline was 92 days after grant and missing it was lethal. The new rule is more forgiving but founders still miss it because they file the ERS annual return (also due 6 July) and assume the EMI notification is part of the same submission. It isn't. The EMI notification is a separate step inside the ERS service, made when you set up the EMI scheme or add new options to it.

Miss the notification and the option loses EMI status completely. There's no late-filing fix, no penalty alternative that preserves the tax treatment. The option becomes a regular unapproved option and the employee will pay full Income Tax and NIC on exercise. We see this most often with companies that incorporated EMI grants into a shareholders' agreement at year-end and then forgot to flag it to their accountant.

The 2-year hold and BADR at exit

EMI options qualify for Business Asset Disposal Relief (BADR) when the shares are eventually sold, with one specific condition: the option must have been granted at least 2 years before the disposal date. For EMI, the BADR personal company test (5 percent shareholding, employee for 2 years before disposal) is waived. The 2-year clock starts on the grant date, not the exercise date.

This matters for exit timing. If a founder grants senior hire options 18 months before an acquisition, those options will exercise and sell within the 2-year window. They still qualify for CGT (because the option was tax-free at exercise) but they won't qualify for BADR, so the gain is taxed at 24 percent rather than 14 percent for 2025/26. On a £400,000 gain, that's a £40,000 difference per person.

From 6 April 2026, BADR rises from 14 to 18 percent. The £1 million lifetime allowance stays in place. For exits after that date the BADR rate gap on EMI gains versus standard CGT shrinks (18 percent vs 24 percent), but it's still a meaningful saving over an unapproved option taxed at 47 percent (40 percent Income Tax plus 7 percent NIC after the post-2026 changes).

What happens at exit: a worked example

Take a Series B SaaS startup that grants its Head of Engineering 50,000 EMI options in March 2026 at an AMV of £2.00 per share. The company sells in March 2029 at £12.00 per share. The Head of Engineering exercises and immediately sells, realising a gain of £500,000.

Under EMI, with the option held more than 2 years from grant: no Income Tax or NIC on grant (£0), no Income Tax or NIC on exercise (£0 because strike was at AMV), CGT on the £500,000 gain. The first £1,000 falls inside the annual CGT exemption. The next £999,000 sits inside the BADR lifetime allowance, so the entire £499,000 above the exemption attracts BADR at 18 percent (the 2026/27 rate). Total tax: roughly £89,800.

Under an unapproved option scheme, the same outcome: Income Tax and NIC of around £210,000 (40 percent + 2 percent NIC on the gain at exercise) plus employer NIC of around £67,500 (15 percent), plus residual CGT if any growth between exercise and sale. The Head of Engineering keeps £290,000 instead of £410,000. The £120,000 difference is the entire value of getting EMI right.

When EMI isn't right

EMI is brilliant when it fits, but it has real limits. We've coached founders away from EMI in a handful of recurring scenarios.

You want to grant equity to a non-employee. EMI is employees only, with a minimum 25 hours per week or 75 percent of working time. Contractors, advisors and non-executive directors can't receive EMI. The right tool there is an unapproved option or growth shares.

Your company is in an excluded trade. No workaround inside EMI. Look at a Company Share Option Plan (CSOP) instead, which has fewer trade restrictions and a higher company size threshold, but a per-employee cap of just £60,000.

You want to grant options to someone holding more than 30 percent of the company already. The material interest rule excludes them from EMI. This catches founders who have built the company themselves and now want to grant themselves more EMI. Once a founder crosses 30 percent of voting rights, EMI is off the table for them personally.

You've outgrown the £30 million gross assets threshold. Past this point you're into the larger company schemes (CSOP, SAYE, SIP) which have very different mechanics and lower personal limits.

What this means for you

If you're a UK tech founder with a growing team and any plausible exit story (acquisition, IPO, secondary), EMI is almost certainly the right answer for your first share-option scheme. The setup cost is modest (typically £2,500 to £5,000 all-in for scheme drafting, HMRC valuation and first-year notifications) and the saving per employee at exit is measured in tens or hundreds of thousands of pounds.

The actions to take this quarter, in order:

1. Confirm the company passes the gross assets, headcount, independence and trade tests. If you're in any grey area, get it confirmed in writing before granting.
2. Decide your option pool size (typically 10 to 15 percent of total share capital at seed, expanding to 15 to 20 percent through Series A and B).
3. Draft the EMI scheme rules and individual option agreements. Most are based on a standard template adjusted for your good leaver and bad leaver provisions.
4. File a VAL231 with HMRC's Shares and Assets Valuation team. Allow 6 to 8 weeks.
5. Grant the options inside the 90-day VAL231 window.
6. Notify HMRC through the ERS online service by 6 July following the end of the tax year of grant.
7. Diarise the annual ERS return (also due 6 July each year) for every year any EMI option is outstanding.

Get any of those steps wrong and the scheme either fails entirely or quietly loses status on individual options. None of it is intellectually hard, but the sequencing and the deadlines need to be tracked precisely.

Frequently asked questions