What is EMI2?
From 6 April 2027, the existing Company Share Option Plan (CSOP) will be rebranded as “EMI2”. The Autumn 2026 Budget changes introduce greater flexibility, making the scheme a more credible alternative for companies that cannot use Enterprise Management Incentives (EMI).
CSOP is a tax-advantaged share option scheme that allows qualifying companies to grant employees options over shares, potentially without an income tax or National Insurance contributions (NIC) charge. Unlike EMI, EMI2 will be available to much larger businesses and will not be subject to EMI’s qualifying trade requirements, £120m gross asset limit or 500 full-time employee limit.
Several conditions must still be met. These include a requirement for the option holder to be an employee or full-time director, and for the option exercise price to be at least the market value of the shares when the option is granted.
Historically, companies have often favoured EMI over CSOP because CSOP has more restrictive rules and offers fewer tax advantages. For example, qualifying EMI option holders can access Business Asset Disposal Relief without meeting the usual 5% shareholding requirement, potentially reducing the capital gains tax (CGT) rate to 18%. CSOP does not offer this benefit.
Key new changes
Increased Individual Limit
The maximum value of shares an individual can hold under EMI2 options will increase to £120k, double the current CSOP limit of £60k.
Previously, CSOP options counted towards an employee’s £250k EMI limit. An employee holding £60k of CSOP options could therefore only hold £190k of EMI options. Under the changes, the two limits will be separate.
As a result, an employee could potentially hold:
- EMI options over shares worth £250k; and
- EMI2 options over shares worth £120k.
This creates a combined tax-advantaged option opportunity of up to £370k per employee.
For fast-growing businesses, this increases the amount of equity that can be awarded tax-efficiently to senior management and key employees which is particularly valuable in a challenging economy.
Extended Exercise Period
Another valuable, but less publicised, change is the extension of the maximum option exercise period from 10 to 15 years.
This gives companies more flexibility when designing long-term incentives and brings the scheme closer to EMI. It also provides a longer window for a company sale, allowing employees more time to exercise qualifying options while retaining favourable tax treatment.
Structuring flexibility
EMI2 options can be granted over growth shares as well as ordinary shares. Growth shares give employees a stake only in value created above a specified threshold. Their lower value may therefore allow a company to grant options over a greater number of shares within the individual limit.
This can be particularly useful for an already valuable business that wants to reward management for future growth rather than existing value.
Potential limitations of EMI2 compared with EMI
Rebranding CSOP as EMI2 may suggest a longer-term intention to bring the two schemes’ rules closer together. However, no further alignment has been announced. The existing differences between EMI and CSOP are therefore expected to remain under EMI2. The main differences are outlined below.
Business Asset Disposal Relief (“BADR”)
Under an EMI arrangement, qualifying option holders may be able to access BADR without needing to meet the normal 5% shareholding requirement, potentially reducing the capital gains tax rate on qualifying gains from 24% to 18%.
EMI2 option holders will generally not benefit from the special BADR treatment available to qualifying EMI option holders. With the reduced BADR limit of £500k, paying CGT at 24% rather than 18% could now result in an additional £30k of tax.
The Three-Year Holding Requirement
To secure the main tax benefits, EMI2 options are expected to need to be held for at least three years before exercise. This is an existing CSOP requirement and, subject to further announcements, is expected to continue under EMI2. EMI has no equivalent minimum holding period before exercise.
Earlier exercise is permitted in certain circumstances, but the rules are complex and depend on the transaction. If the relevant conditions are not met, an income tax charge may arise on exercise, rather than the employee benefiting solely from CGT treatment on a subsequent sale.
Companies anticipating an exit within three years should therefore consider carefully whether EMI2 is appropriate. Favourable tax treatment can be preserved in some exit scenarios, but the conditions are not always straightforward. Specialist advice and cooperation from the buyer are normally needed.
Overall
EMI2 could turn a scheme historically viewed as a second choice into a useful complement to EMI. EMI remains the preferred option where available because of its favourable BADR treatment. However, EMI2’s £120,000 individual limit, 15-year exercise period and greater structuring flexibility make it an attractive option for companies that do not qualify for EMI or want to grant options beyond the £250k EMI limit.
For many growing businesses, the choice need not be between EMI and EMI2. Using the schemes together could provide up to £370,000 of tax-advantaged options per employee, helping businesses recruit, retain and reward key talent.
If your Company is nearing the end of EMI qualification or is looking to issue equity to employees for the first time, please reach out to us on +44 20 7396 4275 or at ngreen@haysmac.com .
