EMI schemes can be a powerful, tax‑efficient way to attract and retain talent, but strict HMRC rules mean not every business qualifies. Misunderstanding the criteria can waste time, derail expectations and disappoint key hires.
This article is for UK founders and finance leads weighing an options plan ahead of a funding round or senior hires. You’ll learn how to check company and employee eligibility, where grey areas arise (groups, overseas staff, rapid growth), why timing and investor expectations matter, and what to do if EMI isn’t available, from CSOPs to growth shares and phantom plans, so you can move forward with confidence.
If you want fast, clear answers, or a compliant scheme from valuation to HMRC notifications, speak to our EMI scheme solicitors before you promise options to staff.
Contents:
Does my business qualify for EMI options? Key criteria to check
EMI schemes are HMRC sponsored schemes, which means they carry generous tax reliefs for employees and the employer. But that also means the government sets strict rules. Think of it as a checklist you must pass before you can even open the door.
| Test | Requirement | Why it matters |
| Company size | Gross assets of £30 million or less | Primarily designed for SMEs |
| Employee numbers | Fewer than 250 full-time equivalent employees | Keeps scheme focused on smaller businesses |
| Trading activities | Must carry on a “qualifying trade” | Certain sectors (banking, property, farming, legal/accountancy) are excluded |
| Shareholding | Company must be independent (not majority-owned by another company) | Ensures EMI is used for independent ventures, not subsidiaries of large groups or private-equity backed companies with majority stakes |
| Establishment | Must have a permanent UK base | To focus relief on UK activity |
| Option limit per employee | Max £250,000 of unexercised EMI options | Earlier grants when valuations are lower allow more up-side to benefit from EMI tax reliefs |
| Overall scheme limit | Max £3 million of unexercised EMI options across company | Not usually an issue in practice |
| Share type | Options must be granted over ordinary share capital not preference shares | Prevents manipulation of value through special share rights |
Example: A medtech start-up with £10m in assets and 80 employees should qualify. But if it’s majority-owned by a US healthcare giant, it won’t.
Read our EMI scheme FAQs to learn more about what EMI schemes are, and commonly asked questions our clients ask us when exploring EMI.
Employee eligibility
It’s easy to assume that once your company qualifies, anyone on your payroll can receive EMI options. But in practice, employee eligibility trips up many founders.
- Working time requirement: Staff must work at least 25 hours per week or, if less, devote 75% of their total working time to the company. This excludes portfolio executives with multiple roles. If you’re hiring a part-time CFO or a technical adviser who splits their time across ventures, EMI won’t apply.
- Directors: Executive directors usually qualify, provided they meet the time requirement. Non-executive directors do not qualify.
- Founders with large stakes: Employees who already own more than 30% of shares can’t receive EMI. This matters if you have a co-founder who holds a majority position, but you’d still like them to benefit from option-like upside.
Anecdote: A London-based edtech company brought in a part-time CTO working two days a week. The founder promised EMI options without realising the 25-hour rule. They had to switch him onto non-tax advantaged options at the last minute. The change was frustrating and set the relationship off on the wrong foot, a good reminder to check eligibility early.
Grey areas to watch out for
Some of the trickiest questions arise where your corporate structure or workforce doesn’t fit the EMI 'ideal':
- Group restructures: If you’ve recently converted to a group structure, you need to ensure the “parent company” issues the options and that subsidiaries are qualifying companies. Failing to set this up properly can invalidate the options.
- International employees: Staff based abroad need separate arrangements. They won’t benefit from EMI tax reliefs because they do not work in the UK. For example, a UK-based biotech with labs in Cambridge and Boston sets up EMI for UK staff but uses a phantom share plan for US employees. Communicating the difference clearly is key to avoiding resentment. Enabling staff to benefit from any tax-advantaged schemes in their local territory can be helpful too, particularly where they are key hires.
- Rapid growth companies Start-ups scaling quickly sometimes blow through the 250-employee threshold. Once you cross it, you can’t grant new EMI options, but existing options remain valid. Planning your option grants in advance of major hiring rounds is critical.
What if I don’t qualify?
Not qualifying for EMI doesn’t mean you can’t incentivise staff. The alternatives can be powerful if structured well.
Company Share Option Plans (CSOPs)
These used to be less attractive, but limits were recently increased, making them more practical for larger businesses. They’re still less generous than EMI but provide a tax-advantaged route.
Growth shares
Popular in private equity-backed companies. Employees receive a special class of shares that only participate once the company value exceeds a hurdle. This focuses rewards on future growth. However, they involve upfront share ownership (not options), which can complicate shareholder agreements.
Read more about growth shares and how they work in our article.
Non-tax advantaged options
These are straightforward to grant and flexible in design. The drawback is tax: employees generally pay income tax and NIC on exercise, rather than capital gains tax at sale on the upside. Still, they can be valuable for senior hires who want exposure to upside and the employer can still secure tax reliefs
Phantom share schemes
These mimic the economics of equity but are cash-based. Employees never become shareholders, which means no dilution for founders. They’re often used in international contexts where EMI isn’t possible. The downside is that they are a cash liability to fund when value is realised.
We've created a handy phantom shares FAQ guide if you want to read more.
Why investors care
Investors frequently ask: 'What’s your option pool? Have you set up EMI?'
Why? Because:
- It shows you’ve thought about retention
- It reassures them that key hires are incentivised to stay
If you don’t have an EMI scheme in place before a fundraising, don’t panic as the scheme can be implemented post-round. It can be messy to implement a scheme once a round is underway so in this case, it’s best to defer until post-round. Many businesses do implement post-round, when they have the funds available to engage lawyers to implement the scheme.
Investors will also think about your future exit plans, and how your EMI scheme is handled. Read about the top 5 EMI mistakes uncovered during an exit, and how to avoid them in our article.
Example: A fintech founder negotiating a £5m Series A was told by the VC that an option pool of at least 15% was required. Because the company had already implemented an EMI scheme covering 12% of shares, it was easy to extend rather than redesign.
Practical next steps
If you’re thinking about EMI:
- Check eligibility early: Don’t announce it to staff until you’re sure.
- Get valuations cleared with HMRC: This helps to protect employee tax treatment.
- Document carefully: The scheme must be written into formal option agreements.
- Communicate clearly: Staff often don’t understand how share options work. A short explainer goes a long way and using an online platform can be even more effective.
Conclusion
For founders, EMI isn’t just a tax perk; it’s a cultural signal. It says to your team: 'You are part of the journey, and you’ll share in the rewards.'
If you qualify, EMI is almost always worth pursuing. But you need to:
- Confirm both company and employee eligibility up front.
- Think about timing (read more in our article to find out how long it takes to set up an EMI scheme)
- Put alternative plans in place for those who fall outside EMI rules.
If you don’t qualify, don’t panic. Alternatives like CSOPs, growth shares, and phantom schemes can still provide powerful incentives. What matters most is consistency and transparency. Staff want to feel their contributions are valued, and that there’s a clear path to reward if the company succeeds.
Ultimately, EMI and its alternatives are legal tools and their effectiveness depends on effective communication and culture. A well-drafted plan, explained clearly to your team, can make the difference between employees feeling like staff versus genuine stakeholders.
Why legal advice matters
Setting up an EMI scheme is one of those areas where the detail really matters. A scheme that looks fine at first glance can easily fall foul of HMRC rules if the paperwork isn’t watertight or if eligibility checks are missed. That can mean employees losing their tax advantages, or the scheme being challenged at exactly the wrong moment, for example, during a funding round or an exit. Understand more about why legal advice matters when setting up an EMI scheme in our article.
That’s why it pays to involve lawyers early. By getting the structure right from the outset, you can avoid costly mistakes, reassure investors, and give your team confidence that the options they’re granted are genuinely valuable. Lawyers can also help you deal with what happens when an employee leaves an EMI scheme, which we cover in our article.
At Harper James, we work with start-ups and scale-ups every day to design and implement share schemes that fit their stage of growth. We’ll:
- Check whether you qualify for EMI
- Draft compliant scheme rules and option agreements
- Deal with HMRC notifications and valuations
- Advise the company and the employees on the tax benefits of the scheme
- Advise on alternatives if EMI isn’t right for your business
The result is a scheme that’s robust, tax-efficient, and aligned with your long-term plans. If you’re considering EMI or another form of employee incentives, get in touch with our EMI scheme solicitors early, so you can focus on growing your business, knowing the legal foundations are in place.
