On 6 April 2026 the gross assets limit for Enterprise Management Incentives (EMI) went from £30 million to £120 million, and the employee limit from fewer than 250 to fewer than 500. Companies that had outgrown the old thresholds may now be back within its enlarged size limits. What a scheme costs you in control is still settled by the vesting, the leaver provisions and the articles.
Your best engineer asks for equity. You would rather keep her than replace her, you do not want to hand over shares outright, and a share option is the obvious answer. You agree a percentage over coffee and ask the accountant to sort out the paperwork.
Eighteen months later she resigns and joins a competitor. Whether she keeps anything, and on what terms, was settled the day the option agreement was signed. Nobody read it closely then, because the conversation was about tax.
There is a reason to look at this now. On 6 April 2026 the eligibility limits for Enterprise Management Incentives moved a long way, and companies that had outgrown the old thresholds may now be back within the enlarged ones. The rest of the conditions have not changed, and they still have to be met.
One point before the detail, because it is the misunderstanding I hear most. Owners tell me they want to give the team some equity, and mean something a good deal narrower than the words suggest. They want the people who build the value to share in it if the business sells. They do not want a second shareholder with a vote, a right to the accounts and a view on the dividend policy. EMI does the first without the second, but only where the documents are written to do it.
It is worth being clear about what the tax advantage actually is, because the rest of this piece assumes it. Where the EMI conditions are met and continue to be met, no disqualifying event has intervened and the exercise price is at least the market value of the shares at the date of grant, exercising the option normally carries no income tax and no National Insurance. Capital gains tax can arise when the shares are sold, and the company may get a corporation tax deduction on exercise. The detail of that is for your tax adviser. What matters here is that the relief depends on conditions being kept up, and on documents that do what they are supposed to.
1. What changed on 6 April 2026
Section 13 of the Finance Act 2026 raised three of the EMI eligibility thresholds and extended a fourth, with effect from 6 April 2026:
- gross assets: from £30 million to £120 million;
- full-time equivalent employees: from fewer than 250 to fewer than 500;
- total value of shares under a company’s unexercised qualifying options: from £3 million to £6 million; and
- the period within which an option must be capable of being exercised: from ten years to fifteen.
Three qualifications. The gross assets, employee number and exercise period changes bite on options granted on or after 6 April 2026, so an option granted before that date keeps its ten-year life; the company limit is measured at any time. The £250,000 individual limit did not change. And a company with a registered office in Northern Ireland carrying on a trade in goods or in electricity keeps the old figures, because of the United Kingdom’s subsidy-control obligations.
That last point is being reported loosely and it is worth getting right. Parliament did create a route for extending an existing option, but a narrow one, available only for an option exercisable on a single date fixed by reference to its grant date and only where the option has not already lapsed, expired or been exercised. Most option agreements are not built that way. Where an option is exercisable on an exit, or across a window, its lapse date can usually be moved under the option’s own terms without engaging that route at all. Which of the two you have is a reading exercise on the agreement, and it needs doing before anyone plans around fifteen years. The conditions are set out in full in our client guide.
2. An option is not a share, and that is the point
An EMI option is a contract. It gives the holder the right to buy a fixed number of shares at a fixed price, if and when the conditions in the agreement are met. Until it is exercised the holder is not a shareholder: no vote, no dividend, no shareholder information rights, no standing to petition on the ground of unfair prejudice. The register of members is a separate matter: the Companies Act lets a member inspect it free and anyone else on payment of a fee, subject to the company’s right to apply to the court where the request is not for a proper purpose. That right does not come from the option.
That is the appeal for an owner-managed business, and it is why an option usually beats a gift of shares. It carries a consequence people miss. Everything the holder eventually gets, and when, has to be built into the option agreement and the articles, because there is no shareholder relationship doing that work in the background. Two questions decide most of it. When can the option be exercised, and what happens if the holder leaves before then?
3. Vesting, leavers, and where the control actually sits
Vesting determines how much of the option has been earned. The exercise provisions determine when the earned portion can actually be exercised. They are separate, and under an exit-only option someone can be fully vested and still unable to exercise until a sale. A common vesting shape is a one-year cliff followed by monthly or quarterly vesting over three or four years, so someone who leaves in month eleven has earned nothing. That is a commercial choice rather than a legal requirement, and it should follow how long it takes for that person’s contribution to show up in the business.
The leaver provisions decide what happens when someone goes, and this is the clause that most often fails to do what the owner assumed. Three things need settling expressly.
What lapses, and when. Unvested options will usually lapse on the day employment ends, subject to any good-leaver treatment you have agreed. Vested options need a stated fate: lapse, or survive for a defined window. Say which, and say what date the window runs from. And design that window with the tax in mind, because leaving employment is normally an EMI disqualifying event, and exercise more than ninety days later brings the growth since then, and any discount at grant, into the employment income charge. A twelve-month window that reads generously can hand someone a tax bill.
Who is a good leaver and who is a bad one. Define both. Resigning to join a competitor is not the same as retirement, ill-health or redundancy, and the definitions should not be left to a board discretion exercised after the argument has started. A good-leaver definition reading “as the board may determine” is not a definition.
What happens to shares already acquired. Once the option is exercised the holder is a shareholder and the option agreement no longer bites. Compulsory transfer provisions in the articles are what bring those shares back, and they need a price mechanism that works: market value for a good leaver, something lower for a bad one, and a valuer identified in advance rather than argued over afterwards.
Exercise triggers are the other half of it. An exit-only option, exercisable only on a sale or a listing, keeps the register clean until the day that stops mattering, and it is the right default for most owner-managed businesses. Where options can be exercised while the company is still private, expect a share register carrying people who no longer work there.
4. Dilution, and modelling it before you commit
“Five per cent” means different things to the person offering it and the person receiving it. Decide which you mean before the conversation: five per cent of the shares in issue today, or five per cent of the fully diluted capital, counting every option granted and every share reserved for the pool.
Model the whole pool rather than the individual grant. A scheme is rarely a one-off, so the question is what the cap table looks like after three or four years of grants. Model it with a funding round in it as well, because an investor will usually want the pool created or topped up before the money goes in, which puts the dilution on the existing shareholders rather than on the investor.
Then look at what the diluted position does to the thresholds that matter: the seventy-five per cent needed for a special resolution, any reserved-matter consents in the shareholders’ agreement, and any level at which a shareholder acquires a right they did not have before.
5. The scheme, the articles and the shareholders’ agreement
A share scheme is not a standalone document. It has to work with what is already there, and the checks are mechanical.
Are the shares capable of being issued at all? EMI shares must form part of the ordinary share capital, be fully paid up and not be redeemable. Where the plan is a separate class, the articles need that class, with its rights set out.
Do the usual allotment obstacles apply? For a genuine employees’ share scheme, largely not. Section 549 of the Companies Act 2006 takes an allotment under an employees’ share scheme, and the grant of rights to subscribe for the shares, outside the statutory authority-to-allot requirement, and section 566 disapplies the statutory pre-emption right for securities held under such a scheme. What that does not touch is the contractual layer, which is where the work actually is: pre-emption provisions in the articles are separate from the statutory right and survive it. And the exemptions turn on the statutory definition, which covers employees and former employees of the company and its group and their immediate families. A plan built for consultants falls outside it and needs its own analysis.
Does the shareholders’ agreement carry a reserved matter covering the creation of a share scheme, or the issue of new shares? It very often does, and the consent has to be obtained before the grant rather than remembered afterwards.
Do drag-along and tag-along still work once option holders become shareholders? Drag thresholds are calculated on the share capital in issue at the time. If a sale triggers exercise and a dozen new shareholders arrive the same week, the drag clause has to catch them, and the compulsory transfer provisions have to apply to shares acquired on exercise and not only to shares held by the founders.
6. When EMI does not fit
Not every company qualifies. The trading requirement excludes a list of activities: dealing in land, commodities, futures, shares or securities, property development, certain financial activities including banking, insurance, money-lending, debt-factoring and hire-purchase financing, farming and market gardening, hotels and comparable establishments, nursing and residential care homes, shipbuilding, coal and steel production, and legal or accountancy services, which rules out this firm and our accountancy colleagues alike. A company whose trade includes an excluded activity to a substantial extent cannot use EMI. There is no statutory safe harbour; HMRC normally accepts that excluded activities are not substantial where they account for no more than 20 per cent of the trade on a reasonable measure, but that is administrative practice rather than a test. Nor can a company that is a 51 per cent subsidiary of another, which catches most companies sitting below the top of a group.
Where EMI is unavailable, look at the Company Share Option Plan before moving straight to an unapproved arrangement. CSOP is also tax-advantaged and has no gross assets or employee-number limit. It does not impose EMI’s qualifying-trade test at all, which is what makes it available to many companies EMI is not, though it has its own company, share, participant and exercise conditions. The trade-offs are a £60,000 individual limit against £250,000, and relief that generally depends on exercise between three and ten years after grant.
Two further alternatives do most of the remaining work.
Growth shares. A new class issued at a low value today, carrying rights only to the growth above a stated hurdle. The holder becomes a shareholder immediately, so the articles have to do the work the option agreement would otherwise have done: the hurdle, the rights on a sale, the leaver treatment and the compulsory transfer mechanics all sit in the articles and the subscription documents. Useful where EMI is not available, or where the recipient is a genuine consultant rather than an employee. Directors, including non-executive directors, are employees for EMI purposes and are not excluded as a category, though many non-executives will not meet the working time requirement.
Unapproved options. The same contractual shape as EMI without the statutory conditions, and complete flexibility over who receives them and on what terms. The trade-off is the tax treatment on exercise. Employer’s National Insurance does not arise on every exercise: it depends among other things on whether the shares are readily convertible assets. Where it does arise, contractual recovery from the option holder should be built into the documents at grant. A statutory joint election may nevertheless cover an award already made, provided it is entered into before the liability arises.
7. The deadlines, and what missing each one actually costs
None of what follows is difficult and all of it is easy to forget. What is easy to misjudge is the consequence, which differs in each case. Missing the notification deadline can cost the EMI treatment outright. The others cost penalties, or leave a tax position settled by default rather than by choice.
Notification. An EMI option granted on or after 6 April 2024 must be notified to HMRC on or before 6 July following the end of the tax year in which it was granted. The old ninety-two-day rule has gone for those grants, though it still governs options granted before 6 April 2024. An option granted in May 2026 and one granted in March 2027 both have to be notified by 6 July 2027, which gives you fourteen months in one case and four in the other. Late notification costs the tax treatment unless HMRC accepts a reasonable excuse, and a delay by an adviser is not on its own a reasonable excuse. A simplification is proposed for options granted on or after 6 April 2027, under which grants would be reported through the annual return instead, but it is draft legislation and every option granted before that date still needs separate notification.
The annual return. Every registered scheme needs an employment related securities return by 6 July following the end of the tax year, including a nil return where there is nothing to report. The penalties are £100 automatically, a further £300 at three months, another £300 at six months and £10 a day after nine. Unapproved options and growth shares are caught too where the award is employment-related: they are registered as “other” arrangements and reported the same way. An award to a genuinely independent consultant needs its own analysis.
Section 431 elections. Where restricted shares are acquired and an election under section 431 of the Income Tax (Earnings and Pensions) Act 2003 is wanted, it has to be made jointly before the acquisition or within fourteen days after it. An EMI option exercised with the full relief under section 530 is treated as carrying one anyway, but that does not apply to an option granted at a discount, where the relief is under section 531. The live decisions are therefore on discounted EMI options, unapproved options, growth shares and exercises after a disqualifying event. Fourteen days is short, and the window falls in the middle of a completion.
Disqualifying events. Certain events stop an option qualifying from that date, the company losing its independence among them. Exercise within ninety days of the event preserves the treatment. Miss it and the increase in value between the event and the exercise is taxed as employment income, with National Insurance where the shares are readily convertible assets.
What to do before you grant
Decide what you are actually giving: a share today, or a right to buy one on an exit. Settle who is a good leaver and who is not, in writing, before anybody leaves. Read the articles and the shareholders’ agreement for the consents and the pre-emption position before the board meets rather than after. Model the pool fully diluted, then model it again with a funding round in it. Check the company’s activities against the excluded list before anyone assumes EMI is available. Line up the valuation and the tax input before the grant rather than after it, because an agreed valuation runs for ninety days and the documents have to be ready inside it. Put the notification date and the 6 July return date in the diary on the day of grant. And where a sale is anywhere on the horizon, deal with the options as part of the deal planning, rather than in the week before completion when the option holders become the last people whose signatures you need.
Quick answers
Do my option holders become shareholders when I grant the options?
No. An option is a right to acquire shares at a future date. Until it is exercised the holder has no vote, no dividend and no member rights by virtue of the option. That is usually the point of using one.
My company is above the old £30 million gross assets limit. Can I still use EMI?
Possibly. For options granted on or after 6 April 2026 the gross assets limit is £120 million and the employee limit is fewer than 500 full-time equivalents. The trading and independence requirements still have to be met, and the £250,000 individual limit has not changed. A company keeps the old figures where the relevant employer company is a specified Northern Ireland company, meaning one with a registered office there carrying on a trade in goods or in electricity.
Can I extend my existing options from ten years to fifteen?
Sometimes, and it turns on how the option is drafted. Where it is exercisable on a single date fixed by reference to grant, there is a statutory route needing a written variation made before the tenth anniversary, and available only where the option has not already lapsed, expired or been exercised. Where it is exercisable on an exit or across a window, the lapse date can usually be moved under the option’s own terms. Read the agreement before assuming either.
| Where the line runs. We design and document the scheme: the plan rules and option agreements, the vesting and leaver provisions, the board and shareholder approvals, the changes to the articles and the shareholders’ agreement, and the options workstream on a sale. Share valuations, the agreement of a valuation with HMRC, the tax analysis and the HMRC registrations and returns are not ours unless separately agreed: they sit with Fusion Tax or your own tax adviser. Where appropriate, we work alongside our tax, accountancy and financial-planning colleagues across Fusion Consulting Group. |
The tax relief is the part everyone asks about first. What you give away, and whether you get it back when someone leaves, is decided by the option agreement and the articles. Download the full guide: EMI and Employee Incentives — Rewarding the Team Without Losing Control (PDF), including the EMI eligibility checklist and the scheme design and leaver worksheets.
This article provides general information about the law of England and Wales. It is not legal, tax or financial advice. Law stated as at 23 August 2026.
