Enterprise Management Incentives (EMI) is the most tax-efficient way for eligible UK companies to grant share options to employees, but the tax advantages hang on a threshold question founders often skip: does the company itself qualify? Fail any one of the tests and the options are not qualifying EMI options, and the tax break simply does not apply, however carefully the pool was designed. Below is each test, how HMRC measures it, and the fallback if your company does not pass.
BLUF: does your company qualify to run EMI?
A company qualifies to run EMI if it has gross assets of £30m or less, fewer than 250 full-time-equivalent employees, carries on a qualifying trade with no excluded activities, and grants options that stay within £250,000 per employee (rolling three-year window) and £3m across the company. Each employee receiving options must also meet a working-time commitment to the company. If any test is breached, the CSOP £60,000-per-employee fallback is the next step.
The qualification checklist
The table below summarises every company-level test, the threshold, how it is measured, and what a failing result means in practice. All figures come from HMRC's EMI guidance.
| Test | Threshold | How it is measured | Fail outcome |
|---|---|---|---|
| Gross assets | £30m or less | Total balance-sheet assets (no liability netting) at date of grant | Options are not qualifying EMI options |
| Full-time-equivalent employees | Fewer than 250 | Part-time and part-year staff count proportionally | Scheme cannot be run |
| Qualifying trade | No excluded activities as a substantial part of the business | Nature of the trade at date of grant | Disqualified from EMI entirely |
| Per-employee value limit | £250,000 unexercised option value | Rolling three-year window from earliest unexercised grant | Excess options are not qualifying |
| Per-company value limit | £3m total unexercised options | Aggregate unexercised market value across all EMI grantees | New grants push total above cap; excess not qualifying |
| Employee working-time | 25 hours a week, or 75% of total working time | Hours worked for the company, or share of total working time | Individual employee's options are not qualifying |
Company gross assets: £30m or less
Gross assets must be £30m or less at the date each batch of options is granted. The test applies at grant, not at the date the option is exercised, so a company that was within the limit when it granted options in year one does not lose qualifying status on those grants simply because it grew beyond £30m in year three.
Gross assets means the total value of all assets on the balance sheet, without netting off any liabilities. A company with £35m of assets and £20m of debt has gross assets of £35m and fails the test, even though its net asset position is positive. This is an important distinction for asset-heavy businesses such as those holding intellectual property, property, or significant receivables.
For groups, the test is applied to the qualifying subsidiary, not the parent, but the parent's assets are brought in for group purposes. If your company is part of a group, the calculation is more involved. Details are in the HMRC EMI manual on the gross assets test.
Headcount: fewer than 250 full-time-equivalent employees
The company must have fewer than 250 full-time-equivalent (FTE) employees at the date of grant. This is not a simple headcount of the number of people on the payroll. Part-time employees and part-year employees count proportionally toward the 250 FTE figure.
For example, two employees each working half-time count as one FTE. A seasonal worker employed for six months of the year counts as 0.5 FTE. A company with 260 people on payroll but a 200-FTE equivalent workforce passes the test. Conversely, a company with 220 people, many of whom work full-time plus overtime, may find its FTE count closer to the headcount than expected.
For groups, the FTE of all group members is aggregated. This is the test most likely to catch a company that has recently completed a large acquisition or grown rapidly via a hiring surge. Check FTE at every grant cycle, not just when you set the scheme up.
No excluded activities
The company's trade must be a qualifying trade. HMRC sets out a list of excluded activities; a company that carries on any excluded activity as a substantial part of its business fails the trade test and cannot run EMI. The qualifying trade requirement applies to the whole of the company's business, not just a division or a product line.
Excluded activities include, broadly: dealing in land; property development; financial activities such as banking, insurance, money lending and hire purchase; leasing or letting assets; legal and accountancy services; farming and market gardening; and the provision of services to connected businesses that are themselves engaged in excluded activities. This list is not exhaustive and must be checked against current HMRC EMI guidance; do not rely on a summary for a borderline case.
Most product and technology companies pass this test readily. The risk areas are companies that have moved into property, companies that derive material revenue from financial services or insurance activity, and professional-services businesses that may cross into the legal or accountancy carve-out. If any part of your revenue comes from an activity that could be construed as excluded, take specific advice before setting up the scheme.
The value limits: £250k per employee and £3m per company
Even where the company qualifies, each grant must stay within two value caps. Both figures come from HMRC's EMI guidance.
£250,000 per employee (rolling three-year window)
Each employee can hold no more than £250,000 of unexercised option value at any point, measured over a rolling three-year window from the date of the earliest unexercised option still in play. Options granted over the limit are not qualifying EMI options and lose the EMI tax advantages.
The £250,000 is measured by reference to the market value of the shares at the date of the option grant, not the value at exercise. If the company's share value rises sharply between grant and exercise, the increase does not push the employee over the cap. This is one of the reasons getting a good HMRC-agreed valuation at grant matters. See the EMI option valuation guide for how HMRC valuations work in practice.
£3m across the company
The total value of all unexercised EMI options across all grantees in the company cannot exceed £3m at any point. As with the per-employee cap, the value is measured at grant date market value. If granting a new tranche would push the aggregate total over £3m, only the portion up to £3m is qualifying.
Worked example: how the two caps interact
| Employee | Options granted | Grant-date value per share | Value of grant | Running company total | Qualifying? |
|---|---|---|---|---|---|
| Alice (CTO) | 250,000 options | £0.80 | £200,000 | £200,000 | Yes, within £250k and within £3m |
| Bob (VP Eng) | 250,000 options | £0.80 | £200,000 | £400,000 | Yes, within £250k and within £3m |
| Carol (Head of Product) | 350,000 options | £0.80 | £280,000 | £680,000 | Partial: first £250,000 qualifies; £30,000 excess does not |
In this example the company total (£680,000) is well within the £3m company cap, but Carol's grant is trimmed to £250,000 qualifying value. The excess £30,000 can still be granted, but it will be treated as an unapproved option for tax purposes. Use the EMI vs unapproved option calculator to model the tax difference for that excess portion.
The employee working-time requirement
Each employee or director who receives EMI options must meet the working-time requirement: at least 25 hours a week working for the company or, if less, at least 75% of their total working time. The scheme is not available to purely passive or occasional contributors.
Where an employee splits their time between your company and another employer or a consulting practice, check the 25-hours-or-75% test against them individually, because a non-qualifying employee's options are disqualified even where the company itself passes every company-level test. The requirement is set out in the HMRC EMI guidance.
Directors qualify if they also meet the working-time test. Non-executive directors who attend board meetings but do not work in the business are unlikely to qualify.
When you breach a test: the CSOP £60,000 fallback
If your company fails an EMI qualifying test, or if an individual employee's grant would exceed the £250k per-employee cap, the Company Share Option Plan (CSOP) is the main statutory fallback. CSOP allows up to £60,000 of options per employee, with no company-level gross-assets or FTE limit.
CSOP options are granted at market value and the gain on exercise is free of income tax and NIC, provided the employee holds the options for at least three years before exercising. The tax treatment is less favourable than EMI (CSOP does not carry EMI's BADR two-year qualifying route), but it is significantly better than unapproved options.
Breach scenario: a company crossing the £30m gross-assets test
| Situation | EMI position | CSOP position |
|---|---|---|
| Company raises a Series B; post-money gross assets are £38m | No new EMI grants from the date gross assets exceed £30m; existing qualifying grants are not retrospectively disqualified | CSOP is available immediately; up to £60,000 per employee, no gross-assets ceiling |
| Company hires its 250th FTE employee | No new EMI grants from the date the headcount reaches 250 FTE; prior qualifying grants remain | CSOP can be used for new grants to any employee |
| Employee's cumulative rolling value reaches £250,000 | No further EMI grants to that employee until earlier options are exercised or lapse | CSOP can top up the individual by up to £60,000 |
The key point on existing grants is important: breaching a company-level test after a grant has been made does not automatically disqualify the options already granted. The breach prevents new qualifying grants from that date forward, but it is the grant date that fixes whether a particular option is or is not an EMI option. Check the specific rules carefully with your adviser before assuming prior grants are safe, particularly where the company has undergone a significant restructuring.
For a detailed comparison of the two schemes side by side, see the EMI vs CSOP guide.
Getting the scheme set up correctly
Confirming that your company passes the qualifying tests is the first step, not the last. A correctly run EMI scheme also requires:
- An HMRC-agreed valuation of the shares before or at the date of grant (see EMI option valuation guide).
- A written option agreement that meets the statutory requirements.
- Grant notification to HMRC by 6 July following the tax year of the grant, the current deadline, which aligns with the annual ERS return deadline.
- Ongoing monitoring for disqualifying events after the grant (see EMI disqualifying events guide).
For funded startups designing their first option pool, the qualifying tests are the gateway check before any pool sizing conversation begins. If you are unsure whether your company passes all six tests, or if the gross-assets or FTE position is borderline, speak to an adviser before granting options. Options granted under a scheme the company does not qualify for are unapproved options, and the tax consequences for employees can be significantly worse.
Our EMI scheme setup service covers the qualification check, valuation, drafting and HMRC notification as a single engagement. For cases where the company does not pass an EMI test, we advise on the CSOP and growth share alternatives.