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HMRC internal manual

National Insurance Manual

Class 1 NICs: Employment - Related Securities: Shares - Enterprise Management Incentives

Section 4(4)of the Social Security Contributions and Benefits Act 1992

Enterprise Management Incentives (EMI) are tax and NIC advantaged share option plans. They are designed to help small, higher risk companies recruit and retain employees who have the skills to help them grow and succeed. They are also a way of rewarding employees for taking a risk by investing their time and skills to help small companies achieve their potential.

No formal approval or clearance is required for EMI but companies must advise HMRC when options under such a plan are granted. EMI options can be awarded by independent trading companies with gross assets not exceeding £30 million and options over shares worth up to £120,000 can be granted to any number of employees, subject to a total value of £3 million.

There is no NICs liability, or income tax charge, when an option is exercised because the gains fall outside Chapter 5 of Part 7 to the Income Tax (Earnings and Pensions) Act 2003 and therefore no amount can be treated as earnings. However, where:

  • an option is granted to acquire shares at less than the market value; or
  • the shares are restricted shares or subject to forfeiture; or
  • the employees receive a cash payment for cancelling an option; or
  • a disqualifying event occurs

an income tax charge and NICs liability arises.

The following are disqualifying events:

  • the employee ceases to be an eligible employee; or
  • the grantor and its subsidiaries no longer carry on a qualifying trade, or takeover or merger or demerger where the options are exchanged for options in the new company but the new company does carry on a qualifying trade; or
  • the grantor grants the holder of an EMI option an option under an approved HMRC discretionary plan; or
  • either the share capital of the company or the terms of the option are altered without the approval of HMRC.

Provided the shares are readily convertible assets (see NIM06835) an amount which counts as employment income is treated as earnings liable for Class 1 NICs.

The Small Company Enterprise Centre deals with all EMI enquiries and notifications.

See ERSM304000 for further information about EMI plans.