EMI vs Growth Shares: Which UK equity scheme is best for startups?

EMI vs Growth Shares: A Quick Comparison of UK Startup Equity Plans

Choosing how to reward your team with equity feels like a foundational decision, because it is. For UK startups, particularly those from pre-seed to Series B, this choice often boils down to two primary routes: the tax-advantaged Enterprise Management Incentive (EMI) scheme or the more flexible Growth Shares model. Making the wrong call is not just an administrative headache. It can lead to unexpected tax bills for your team, complicate future funding rounds, and ultimately devalue the very incentive you are trying to create. To learn more, see our hub on share option schemes.

This guide is designed for founders navigating this decision with limited budgets and a lean team, perhaps without a dedicated CFO. We will break down the practical differences in tax, eligibility, cost, and future-proofing to help you determine the best equity scheme for UK startup employees. The goal is to ensure your team is rewarded properly and your company is set up for scalable growth.

At a high level, the choice between these two UK startup equity plans comes down to a trade-off between tax efficiency and flexibility. EMI is a government-approved, tax-advantaged share option scheme with strict rules designed for smaller, high-growth companies. Growth Shares are a class of shares created within your company's articles, offering greater flexibility but with different and potentially higher tax implications.

Tax Implications: How EMI and Growth Shares Impact Employee Take-Home Pay

The most significant difference between the two schemes is their tax treatment, which directly impacts your team's financial outcome at exit. For many founders, this is the deciding factor in the employee share schemes comparison.

The Unmatched Tax Benefits of an EMI Scheme

For the EMI scheme, the tax advantages are clear and powerful. Under a qualifying EMI scheme, employees typically pay Capital Gains Tax (CGT) at a special 10% rate on their gains at exit. This favourable rate is a core benefit, but it is not automatic. To qualify, the conditions for Business Asset Disposal Relief (BADR) must be met, which generally involves holding the options and then the resulting shares for a combined period of at least two years.

This means employees get to keep 90% of their gains, a compelling incentive that is simple to communicate and understand. The clarity of this tax benefit makes EMI a powerful tool for attracting and retaining top UK talent.

Growth Shares and Their Hidden Tax Risks

Growth Shares operate differently. Holders of Growth Shares typically pay the standard Capital Gains Tax rate on their gains, which is currently 20% for higher-rate taxpayers. This is double the rate of a qualifying EMI scheme, meaning a smaller net payout for your team members from the same headline gain.

However, the tax risk with Growth Shares is more complex than just a higher CGT rate. The main danger lies in the initial setup. Growth Shares work by setting a 'hurdle', a valuation threshold the company's share price must exceed before these shares accrue value. If this hurdle is set below the company's fair market value at the time of issue, HMRC can treat the difference as employment income, taxable at rates of 40% to 45%.

To prevent this, a critical administrative step is required. A Section 431 (s.431) election must be jointly signed by the employee and the company within 14 days of receiving the shares. This election ensures that any future increase in value is treated as a capital gain, not income. Missing this 14-day deadline is a common and costly mistake for early-stage companies managing this process for the first time.

EMI Eligibility Rules: Who Qualifies for This UK Equity Scheme?

While the tax benefits of an EMI scheme are compelling, they are only available if your company and your team members meet a strict set of criteria defined by HMRC. Misjudging these rules is a primary pain point, as it can completely void the expected tax reliefs upon exit.

Company Qualification Criteria

First, the company itself must qualify. The key requirements are:

• Gross Assets: Your company’s gross assets must not exceed £30 million at the time the options are granted.
• Employee Count: You must have fewer than 250 full-time equivalent employees.
• Independence: The company must be independent and not a subsidiary of another company.
• Qualifying Trade: Certain industries are excluded from using EMI. According to HMRC manuals, excluded trades include banking, insurance, legal services, and property development. Most SaaS, Biotech, Deeptech, and E-commerce startups will qualify, but it is essential to check your specific circumstances.

Employee Qualification Criteria

Second, the employee receiving the options must also be eligible. The individual must be a contracted employee working at least 25 hours a week or, if less, 75% of their total working time for the company. This rule has a crucial consequence: non-executive directors, consultants, and international employees cannot receive EMI options. This is a critical distinction for modern startups that rely on a global talent pool or a network of advisors. If you need to incentivise these individuals, EMI is not the right tool. You might consider unapproved share options as an alternative.

The Flexibility of Growth Shares

Growth Shares offer a solution where EMI falls short. They have no statutory eligibility rules, and this flexibility is their primary advantage. You can issue Growth Shares to anyone you want to incentivise: UK employees who do not meet the hours requirement, international team members, part-time contractors, and strategic advisors. This makes them an invaluable tool for companies with a distributed team or those wanting to provide equity incentives for employees who fall outside HMRC's narrow EMI definition.

Setup Costs and Admin: Comparing the Real Burden of Each Scheme

For a lean startup, the administrative overhead and cost of setting up and managing equity incentives for employees are major considerations. The reality for most pre-seed to Series B businesses is pragmatic: the simpler and more cost-effective option often wins.

The Procedural Path of an EMI Scheme

Setting up an EMI scheme involves a defined, procedural path. The main administrative step is agreeing on a company valuation with HMRC, which is required to set the exercise price for the options. For practical guidance see our guide on agreeing on a company valuation with HMRC. This process can take three to four weeks and provides certainty that the exercise price is acceptable to the tax authority.

Once the valuation is agreed and options are granted, the grants must be managed correctly. Specifically, all EMI option grants must be notified to HMRC within 92 days of the grant date. While this sounds complex, the process is highly standardised. Platforms like SeedLegals or Vestd have largely automated EMI setup and management, making it accessible and relatively low-cost for founders.

The Bespoke Nature of Growth Shares

Growth Shares, by contrast, are more bespoke. They require changes to your company's legal DNA, specifically by amending the Articles of Association to create a new class of shares. This process typically requires more legal support than an EMI scheme, leading to higher initial setup costs. There is no requirement to agree on a valuation with HMRC upfront, but you must have a defensible valuation to set the hurdle. This places the burden of valuation justification on the company, which can feel less certain than the formal EMI valuation process.

Future-Proofing Your Startup: How Each Equity Plan Affects Growth

Selecting an equity scheme is not a one-time decision; it impacts your company's capital structure and culture for years. Thinking about future fundraising, potential dilution, and how employees perceive the value of their equity is crucial to avoid costly rewrites later.

Investor Perception and Cap Table Management

EMI options are well-understood and respected by UK investors. They are a standard part of the due diligence process for venture capital funds. Because they are options, they only convert to shares upon exercise, typically at an exit event. This makes managing the cap table relatively straightforward, as the options are listed in a separate option pool rather than as issued share capital.

Growth Shares can be more complex for both investors and employees. Because they are an actual class of share, they appear on the cap table from day one and require more explanation during investor due diligence. The hurdle mechanism, while effective, is non-standard and may require clarification for investors unfamiliar with the structure.

Communicating Value to Your Team

The value of EMI options is easy for employees to understand: they have the right to buy shares at a fixed, low price in the future. Their gain is the difference between that price and the exit price, taxed at a favourable rate. See our templates for explaining schemes to staff for help with this.

The hurdle mechanism in Growth Shares can be harder for employees to grasp. A scenario we repeatedly see is confusion over how the hurdle impacts their final payout. Consider this simple numerical example for a SaaS startup currently valued at £1.00 per share. It issues Growth Shares to a new hire with a hurdle set at an aggressive but defensible £1.20 per share. The company is later acquired for £5.00 per share.

• An employee with ordinary shares (or EMI options exercised at a nominal price) would see a gain of approximately £5.00 per share.
• The employee with Growth Shares sees a gain of £3.80 per share (£5.00 exit price minus the £1.20 hurdle).

While the difference may seem small, communicating this distinction is vital for managing expectations. The value of Growth Shares is directly tied to the creation of *future* growth above a set baseline, which is a powerful concept but requires clear and consistent explanation.

How to Choose the Best Equity Scheme for Your UK Startup Employees

To determine the best path forward for your company, work through these key questions. Your answers will create a clear decision framework based on your specific needs.

Step 1: Assess Who You Need to Incentivise

First, identify the individuals you want to reward. Are they just UK-based, full-time employees? If so, EMI is likely the best choice due to its superior tax benefits. However, if your team includes a mix of UK employees, international staff, and non-employee advisors, Growth Shares are your only viable option for the non-qualifying individuals. Many startups run both schemes in parallel to get the best of both worlds.

Step 2: Verify Your Company's EMI Eligibility

Next, check if your company meets the strict EMI criteria. Review the requirements: fewer than 250 employees, under £30 million in gross assets, and not operating in an excluded trade. If you answer yes to all these conditions, you can proceed with an EMI scheme. If you fail any one of these tests, Growth Shares become your default choice for a scalable equity plan.

Step 3: Define Your Primary Goal: Tax Efficiency or Flexibility?

Your strategic priority is a key factor. If maximising the net take-home pay for your core UK team is the absolute priority, the 10% CGT rate from a qualifying EMI scheme is hard to beat. If you need a single, unified scheme to handle a diverse range of contributors globally and avoid administrative complexity, the essential flexibility that EMI cannot offer makes Growth Shares paramount.

Step 4: Evaluate Your Budget and Administrative Capacity

Finally, consider your resources. For a straightforward, templated setup, EMI schemes managed through an online platform are often more cost-effective. Growth Shares typically involve higher upfront legal fees to amend company articles and create the new share class, so be prepared for a larger initial investment of time and money.

Final Takeaway

For most qualifying UK-based startups looking to incentivise their core UK employee team, the EMI scheme remains the gold standard. Its unmatched tax advantages provide a clear, powerful, and easily communicated benefit that is highly valued by both employees and investors. It is a proven model for aligning a domestic team with long-term company growth.

However, as teams become more global and distributed, Growth Shares provide essential flexibility that EMI cannot offer. They are a vital tool in the modern startup's toolkit, enabling founders to reward advisors, international talent, and other key contributors who fall outside HMRC's strict definitions. The choice depends entirely on your company's structure, team composition, and long-term goals. For more resources, visit the share option schemes hub.

Frequently Asked Questions

Q: What happens to employee options or shares if they leave the company?
A: This is governed by the scheme's 'leaver provisions'. Typically, unvested equity is forfeited. For vested equity, rules will define if a 'good leaver' can keep or exercise their shares, while a 'bad leaver' may lose them. These terms are crucial for retaining talent and should be clearly defined from the start.

Q: Can a company offer both EMI and Growth Shares at the same time?
A: Yes, running a hybrid model is a common and effective strategy. Companies often use EMI for their qualifying UK employees to maximise tax benefits, while issuing Growth Shares to international staff, consultants, and advisors. This approach combines tax efficiency with global flexibility.

Q: How complicated is it to switch from one equity scheme to another?
A: You cannot directly convert existing Growth Shares into EMI options. A company would typically start a new scheme alongside the old one. Planning ahead is key, as introducing any new equity plan requires careful legal and administrative setup, including shareholder approvals and potential amendments to company documents.

Q: Why is an accurate company valuation so important for both schemes?
A: For EMI, an HMRC-agreed valuation sets a tax-advantaged exercise price, protecting employees from income tax. For Growth Shares, a defensible valuation sets the hurdle. Setting it too low can create an immediate income tax liability for the recipient. An incorrect valuation in either case can cause significant tax problems.