EMI | Taxation

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Episode 2

Demonstration of TechFranklin's free EMI vs Unapproved tax app

Calculating a gain

Let's assume:

  • 1,000 shares under option
  • £10 exercise price
  • £100 value per share
The gain is equal to (£100 - £10) x 1,000 = £90,000

Unapproved option

If the option is not eligible for EMI then it is an unapproved option (unless it is a CSOP option) meaning the £90,000 gain is essentially treated like a cash bonus and is subject to

  • Income Tax
  • Employee's National Insurance
  • Student loan
And the company is subject to:
  • Employer's National Insurance

EMI

If the option is eligible for EMI then the £90,000 is taxed under Business Asset Disposal Relief (BADR) - a variation on Capital Gains Tax for business assets. The taxation for the employee works as follows:

  • £12,300 is taxed at 0% - reflecting the annual capital gains personal allowance
  • £1,000,000 is taxed at 10%
  • The remaining gain is taxed at the rate of Capital Gains Tax (usually 20%
And the company is not subject to any tax.

Assumptions

  • No other taxable disposals in the tax year
  • AMV at grant equal to or exceeds the exercise price
  • Tax payer is subject to higher rate income tax
  • Option granted 2 years before sale of underlying share

Conclusion

So EMI is advantageous to employee and the company and this advantage is why getting and maintaining EMI status is smart. And it is why using a system like TechFranklin is smart because it helps ensure compliance with EMI.

Having advised lots of companies who issued options thinking they were valid for EMI, only to find out they aren't, I know this realisation is extremely unpleasant and can cause a lot of problems on a sale transaction.

In practice the tax calculation for EMI and Unapproved options are quite tricky, which is why we created our free EMI vs Unapproved tax app

Next blog:

Episode 2

Demonstration of TechFranklin's free EMI vs Unapproved tax app