How to structure an equity compensation plan in compliance with UK laws?

11 June 2024

Equity compensation is a non-cash pay that represents ownership in a company. It's a powerful tool for businesses to attract, retain, and incentivise top talent. While this form of compensation can come in many forms, including stock options, restricted stock, and performance shares, the most common form in the UK is an Enterprise Management Incentive (EMI) scheme. This article will guide you on how to structure an equity compensation plan in line with UK laws, and provide you with an understanding of the tax implications and benefits for both the company and its employees.

The Basics of Equity Compensation

Before delving into the specifics of structuring an EMI scheme, it's crucial to understand the fundamentals of equity compensation. Equity compensation is a powerful tool for businesses, especially startups or high-growth companies, to attract, retain, and incentivise their workforce. This type of compensation allows employees to share in the company's success without the company having to spend precious cash reserves.

Equity compensation comes in many forms, but essentially it represents a share of ownership in the company. This can be given as "stock options", where an employee is given the right to buy shares in the company at a predetermined price, or "shares", where the employee is directly given company shares.

Equity compensation can provide numerous benefits for both the company and the employees. For the company, it means they can conserve cash by paying in equity rather than salaries, and align their employees' interests with that of the company. For employees, it can provide a lucrative payout if the company is successful, and offer a sense of ownership and commitment to the company.

Understanding EMI schemes

In the UK, the most common form of equity compensation is the Enterprise Management Incentive (EMI) scheme. An EMI scheme is a type of share option scheme that's particularly attractive for small to medium-sized companies, as it offers significant tax advantages for both the company and the employees.

EMI schemes work by granting employees the option to buy shares in the company at a future date, at a price that's set when the option is granted. This means that if the company's value increases, the employees can buy shares at a lower price and potentially make a significant profit when they sell them.

To qualify for an EMI scheme, a company must be a trading company based in the UK, and not controlled by another company. It must also have gross assets of no more than £30 million, and fewer than 250 full-time employees. Certain trades, such as banking, farming, and property development, are not eligible for EMI schemes.

Structuring an EMI Scheme

Structuring an EMI scheme is a careful process that needs to be compliant with UK laws. It involves determining the number of shares to be offered, setting the exercise price, and creating a detailed option agreement.

The first step is to decide on the number of shares to be offered. This will depend on the company's valuation, the employees' salaries, and the amount the company wants to incentivise its employees. It's important to strike a balance - offer too little, and the scheme won't be attractive; offer too much, and the company could lose control of its equity.

The exercise price, or the price at which employees can buy the shares, should be set at the fair market value of the shares at the time the option is granted. This can be determined by an independent valuation.

The option agreement is a legally binding document that sets out the terms and conditions of the scheme. It should detail when the options can be exercised, any conditions that must be met, and what happens if an employee leaves the company.

Tax implications

One of the key advantages of EMI schemes is the favourable tax treatment. When an employee exercises their EMI options, they will generally only be liable for Capital Gains Tax, rather than Income Tax and National Insurance contributions. This can result in significant tax savings for the employee.

For the company, the costs of setting up and administering the EMI scheme are generally tax-deductible. In addition, when employees exercise their options, the company can usually claim a tax deduction equal to the difference between the market value of the shares and the exercise price.

Foreign employees and EMI schemes

Foreign employees can participate in a UK-based company's EMI scheme, but there are some additional considerations. First, the company must ensure that the scheme complies with the laws of the employee's home country, as well as UK laws. There may also be additional tax implications for the employee, depending on their home country's tax laws.

In conclusion, while setting up an equity compensation scheme can be complex, the benefits often outweigh the challenges. An EMI scheme can be a highly effective way to attract, retain, and incentivise top talent, while offering significant tax advantages for both the company and its employees.

Administering an EMI Scheme

Managing an EMI scheme requires adherence to a set of guidelines that align with UK laws. This process includes informing HM Revenue and Customs (HMRC), managing the option pool, and handling any modifications or terminations of the scheme.

Informing HMRC about the launch of your EMI scheme is a mandatory step. This should be done online within 92 days of granting the options, along with providing a valuation of the company's shares. The tax office will issue a Unique Scheme Reference Number, which should be used in all further communications.

The management of the option pool, or the total number of shares that the company sets aside for equity compensation, is also a key aspect of administering an EMI scheme. Companies need to ensure that they maintain a healthy option pool, to be able to provide meaningful equity to future hires and avoid diluting the value of existing options.

Any changes to the EMI scheme, such as modifications to the terms of the options or the termination of the scheme, must also be reported to HMRC. This includes any events that may affect the value of the options, such as further fundraising, changes in share capital, or the sale of the company.

Handling EMI Schemes for Foreign Employees

The inclusion of foreign employees in a UK-based company's EMI scheme, while beneficial, necessitates adherence to additional guidelines. The company must ensure that the scheme is in compliance with the laws of the employee's home country and that the employees are aware of any potential tax implications.

It is imperative that companies understand the laws related to equity compensation in the home country of their foreign employees. This could entail consulting with legal experts or a global equity management company. Even within an EMI scheme, the terms and conditions may need to be adjusted to align with the rules of the foreign jurisdiction.

The potential tax implications for foreign employees participating in a UK EMI scheme cannot be ignored. Employees need to be aware of their potential tax liability in both the UK and their home country. For instance, while the UK may offer favourable tax treatment for EMI schemes, the employee's home country may classify the equity as income, subjecting it to income tax.


Equity compensation, particularly in the form of an EMI scheme, is a potent tool that companies can leverage to attract, retain, and incentivise top talent. While the process of structuring and administering such a scheme can be intricate, the benefits - including alignment of employee and company interests, conservation of cash, and significant tax advantages - often overshadow the complexities.

However, careful attention to detail is critical in ensuring that the equity compensation plan aligns with UK laws and potentially, international regulations if foreign employees are involved. By understanding the basics of equity compensation, structuring an EMI scheme appropriately, and diligently administering it, companies can create a rewarding and effective equity compensation plan. This, in turn, can lead to a more engaged and motivated workforce, ultimately driving the company's success.

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