EMI schemes have proven a popular means of incentivising employees in burgeoning small independent businesses as they present relatively low upfront costs to employers and employees with significant tax upsides. In a nutshell, EMI schemes allow employees to be granted options over shares with an exercise price of the current actual market value of shares in the company (which, for added certainty, can be agreed with HMRC).

As long as all EMI conditions are met and followed, the final result will be that employees are able to acquire and sell shares with no employment tax (i.e., PAYE, income tax, NICs) consequences for the employee or employer.

EMI schemes can be relatively flexible in their terms and structure but the most common form of structure for EMI schemes is for exercise to occur at the time of an exit, i.e., typically when founders are ready to sell.  This allows the employee option holders a means of realising their option shares for cash and, typically through cashless exercise, avoids option holders having to personally fund their exercise price.

For founders, exit-only options mean that they can continue to run the business as sole shareholders in the meantime while also effectively incentivising employees to increase shareholder value for a future exit.

What is changing?

In short, the scale.  Up until the Budget changes, EMI schemes were the vestige of start-ups with less than £30 million in gross assets across a whole group and less than 250 employees.  From 6 April 2026, the gross asset test will be increased four-fold to £120 million and the maximum number of employees doubled to 500.  The total value of options capable of being issued by eligible companies will also double from £3 million to £6 million and the life of each option will increase from 10 to 15 years.

In light of the changes announced in the budget, we expect the use of EMI schemes to grow; both in the number of companies that use them and the number of years they can remain open as companies grow in size.  And that will mean that financial sponsors, particularly in the mid-market, will come across an increasing number of targets with EMI schemes, likely with the added complexities that the schemes will have been open for longer, to a greater number of employees and a greater number of options issued.

Tax breaks all round! So what can go wrong?

EMI schemes will only achieve the intended tax outcomes if all eligibility requirements, both initial and ongoing, for the company, employees and option terms are met according to EMI rules. Where conditions are not met (which can happen through oversight or misunderstandings around some of the eligibility criteria that we regularly see in practice), the consequences can be serious at an exit; rather than capital gains tax, employees will be subject to income tax and employee NIC while their employer, the target, will suffer employer NIC and be obliged to apply PAYE to the amounts paid to employees.  If any issues are not identified prior to completing the exit, that could result in a challenging PAYE dispute for the target with HMRC during a fund’s ownership period.

In our view, while the Budget changes mark a positive expansion for EMI schemes, they will also increase the complexity and risk of issues that EMI schemes can already present in M&A transactions.

How to manage the risks

Our Tax and Incentives team is well-versed in the potential pitfalls presented by EMI schemes. First, our detailed approach to diligence will identify potential issues in any target’s EMI scheme before a sponsor completes their acquisition.  We have experience in dealing both with HMRC to reach possible resolutions and with insurance providers as an alternative means of cover when problems do arise.

Second, to protect against the “unknown unknowns”, our diligence informs the preparation of the transaction documents to ensure a solid set of EMI warranties and the ultimate protection in the tax covenant in the SPA can provide fallback cover against sellers.