LTIP Vs EMI Options For Growing UK Companies

You're growing, you're making senior hires, and cash isn't always the best way to compete with bigger employers. Offering someone a slice of future upside can be a smart way to bring them in and keep them motivated.

The tricky part is choosing the right structure. You might have heard about an LTIP, EMI options, growth shares or employee share incentives, and they can start to sound more complicated than they need to be.

The right answer usually depends on your company's size, plans, tax position, exit goals and how much control you want to keep. Let's break it down in plain English.

What Is An LTIP?

An LTIP, or long term incentive plan, is a type of employee share scheme you use to reward key people if they help your business grow over time.

In the UK, LTIP isn't one single legal product. It's more of an umbrella term. Your LTIP might be built using:

• Share options, where an employee gets the right to buy shares later at a set price.
• Nil-cost options, where shares can be acquired for little or no payment if conditions are met.
• Growth shares, where the employee only benefits from growth above a set hurdle value.
• Phantom shares, where you pay a cash bonus linked to share value without issuing actual shares.
• Performance share awards, where shares or options vest if targets are reached.

An LTIP is usually used for senior hires, leadership teams or key employees who can materially affect the value of your business. It can be very flexible because you can set performance hurdles, vesting rules, leaver provisions and exit conditions to suit your plan.

The trade-off is that an LTIP may not have the same tax advantages as a statutory scheme such as EMI. If you issue real shares or non-tax-advantaged options, you need to think carefully about income tax, National Insurance, capital gains tax, valuation and payroll reporting. You'll usually want both legal and tax input before you roll it out.

Is EMI Better Than An LTIP?

Often, yes, EMI can be better than a non-tax-advantaged LTIP if your company and employee both qualify.

Enterprise Management Incentive options are a UK tax-advantaged share option scheme. They're designed for smaller and mid-sized higher-growth trading companies that want to incentivise employees without paying large cash bonuses.

The main reason EMI is popular is tax treatment. If the option is set up correctly and the exercise price is at least the market value agreed at grant, there's usually no income tax or employee National Insurance on grant or exercise. The employee may then pay capital gains tax when they sell the shares. Business Asset Disposal Relief may also be available in some cases, although the rates and conditions should be checked with a tax adviser.

EMI also feels familiar to investors. If you're raising capital or planning an exit, investors and buyers are used to seeing EMI option pools in UK private companies.

That said, EMI isn't always available. Your company needs to qualify, the employee needs to meet working time rules, and there are limits on the value of options. If you don't qualify, a wider LTIP may still work well. In some businesses, EMI options are actually one part of the broader LTIP, with different arrangements for non-qualifying employees or advisers.

When Does An EMI Scheme Work Best?

An EMI scheme works best when you're a qualifying UK trading company and you want to offer real equity upside to employees.

For EMI, the company generally needs to meet requirements including:

• gross assets of £120 million or less at the time options are granted
• fewer than 500 full-time employees
• carrying on a qualifying trade, with certain excluded activities not allowed
• being independent, rather than controlled by another company
• having a UK permanent establishment

Those size limits reflect the expanded EMI rules that generally apply from 6 April 2026. Before 6 April 2026, the limits were generally gross assets of no more than £30 million and fewer than 250 full-time equivalent employees. Those older limits may still matter when reviewing historic grants and in limited cases, including the Northern Ireland exception referred to in HMRC guidance.

There are also limits on the options themselves. Each employee can hold EMI options over shares worth up to £250,000 at the date of grant. The company can generally have up to £6 million of unexercised qualifying EMI options in total. The previous £3 million company limit applied on or before 5 April 2026.

The employee usually needs to work at least 25 hours per week for your company, or 75% of their working time if lower. This can rule out some advisers, consultants, part-time hires and non-executive directors.

EMI is usually a strong fit where you want to:

• reward employees without issuing shares immediately
• tie vesting to continued employment over 3 or 4 years
• give investors comfort that the plan is structured properly
• avoid giving voting rights until options are exercised
• use an HMRC valuation process to reduce valuation disputes

For EMI options granted on or after 6 April 2024, you must notify HMRC on or before 6 July following the end of the tax year in which the options are granted. The old 92-day deadline only applied to grants before 6 April 2024. HMRC has also announced further changes for grants from 6 April 2027, so it's worth checking the filing process before each grant round. You also need to file Employment Related Securities annual returns by 6 July after the end of the relevant tax year. Missing these steps can cause tax and compliance problems, so diary reminders really matter.

When Might An LTIP Be The Better Fit?

An LTIP may be better if EMI isn't available, or if you need more flexibility than EMI gives you.

For example, you might use a broader LTIP if your business has grown beyond the EMI limits, has non-qualifying activities, or wants to incentivise people who don't meet the EMI working time test. It can also be useful for advisers, consultants, overseas team members or very senior hires whose awards would exceed the EMI individual limit.

An LTIP can also be designed around commercial targets that matter to your business. These might include:

• revenue targets
• profit or EBITDA targets
• product launch milestones
• fundraising milestones
• sale or exit events
• personal performance targets

Say Priya runs a SaaS company in Manchester. The company is valued at £8 million and wants to hire a CTO. Priya offers EMI options over 1% of the company, worth £80,000 at grant, with a 4-year vesting schedule and a 12-month cliff. That sits within the £250,000 EMI individual limit and gives the CTO a clear upside if the company grows.

Now imagine the same company later grows to a £130 million gross asset position, expands to 520 full-time employees, reaches the £6 million total unexercised EMI option cap, starts carrying on excluded activities, or wants to incentivise a strategic adviser who only works 2 days a month. EMI may not be available. Priya might then consider a non-EMI LTIP, growth shares or a phantom share scheme instead.

The best structure depends on what you're trying to reward, who you're rewarding and how much complexity your company can manage.

How Do You Set Up A Share Option Plan For A Private Company?

You set up a share option plan by checking eligibility, designing the commercial terms, getting approvals and putting the right documents in place before any promises are made.

Here's a practical order to follow:

1. Decide who the plan is for. List the employees, directors, advisers or consultants you want to include.
2. Check whether EMI is available. Review company size, independence, trade, employee working time and option limits.
3. Choose the type of award. Decide between EMI options, non-EMI options, growth shares, phantom shares or a mixed LTIP.
4. Set the option pool. Work out how much equity you're comfortable reserving, often as a percentage of fully diluted share capital.
5. Agree valuation. For EMI, many companies seek HMRC agreement on market value before grant. HMRC valuations are commonly treated as valid for 90 days.
6. Set vesting rules. Decide whether options vest monthly, quarterly or annually, and whether there's a cliff.
7. Build in leaver rules. Spell out what happens if someone resigns, is dismissed, becomes ill or is made redundant.
8. Get approvals. Check your company constitution, articles, shareholders agreement and Companies Act 2006 requirements for board or shareholder approvals.
9. Sign the documents. Issue plan rules, an option deed or option agreements and any shareholder resolutions before options are treated as granted.
10. File and record. Notify HMRC where required, update your cap table and keep signed records safely.

If options are later exercised and new shares are allotted, you may need Companies House filings such as a statement of capital and return of allotment. You may also need to update statutory registers and issue share certificates.

What Should Your LTIP Or EMI Documents Include?

Your documents should clearly explain who gets what, when it vests, when it can be exercised and what happens if something changes.

Templates can be a helpful starting point, but share incentives are very company-specific. A lawyer should tailor the documents before you use them, especially if you have investors, different share classes or an existing shareholders agreement.

A typical document set might include plan rules, an option agreement, board minutes, shareholder approvals, an HMRC valuation submission for EMI, employee communications and cap table updates.

Fill-In Outline For Your Plan Rules

1. Purpose Of The Plan. Explain that the plan is designed to incentivise long-term growth and retention.
2. Eligibility. State who can receive awards and whether the plan is limited to employees only.
3. Type Of Award. Describe whether awards are EMI options, non-EMI options, growth shares or phantom awards.
4. Grant Process. Set out who approves grants, how grant notices are issued and when options are treated as granted.
5. Exercise Price. Record how the exercise price is calculated and whether it's based on agreed market value.
6. Vesting Schedule. State the cliff, vesting dates and any performance conditions.
7. Exercise Events. Explain when options can be exercised, such as after vesting, on an exit or during a set window.
8. Leaver Rules. Separate good leaver and bad leaver treatment, including lapsing or buy-back rights.
9. Exit Provisions. Cover what happens on a sale, listing, reconstruction or change of control.
10. Shareholder Protections. Require option holders to sign any deed of adherence or share vesting agreement needed under your shareholders agreement on exercise.
11. Administration And Filings. Allocate responsibility for HMRC notifications, ERS returns, Companies House filings and record keeping.

Leaver rules deserve special care. If you don't define them properly, you can end up arguing with a former employee about whether they keep valuable options after leaving the business. That's the kind of dispute you can often avoid with clear wording from day one.

Common Mistakes To Avoid

The biggest mistake is promising equity before you've checked the legal, tax and company approval position.

Equity promises can be hard to unwind. If you say in an offer letter that someone will get 2% of the company, but your shareholders agreement doesn't allow it or your option pool isn't approved, you may have created a commercial and employment problem before the person even starts.

Watch out for these common issues:

• Using vague wording. Say whether someone gets shares, options, a cash bonus or a right to be considered for an award.
• Forgetting dilution. Explain whether the percentage is calculated now or on a fully diluted basis after future option grants.
• Skipping valuation. For EMI, a sensible valuation process helps manage tax risk and expectation-setting.
• Missing EMI filings. For grants from 6 April 2024, notification is due by 6 July following the end of the tax year in which the options are granted. Annual ERS returns are also due by 6 July.
• Ignoring your shareholders agreement. Existing investor consent rights, pre-emption rights and transfer rules may affect the plan.
• Giving voting rights too early. Options usually avoid this until exercise, while actual shares may not.
• No exit plan. Decide what happens if you sell the company before all options have vested.

You should also keep employment documents aligned with the plan. Your employment contracts, bonus wording and staff handbooks shouldn't promise something different to your option agreement. If you use offer letters for senior hires, keep equity language carefully drafted and conditional until the final documents are signed.

Key Takeaways

• An LTIP is a flexible long-term incentive structure, while EMI is a specific UK tax-advantaged share option scheme.
• EMI is often attractive for qualifying private companies because it can offer favourable tax treatment and investor-friendly documentation.
• Current EMI limits are generally higher than they used to be, but company size, option caps, trade requirements and working time rules still matter.
• An LTIP may suit larger companies, non-qualifying businesses, consultants, advisers or awards that don't fit within EMI limits.
• You need clear plan rules, option agreements, approvals, valuation records and HMRC filings where relevant.
• Don't promise percentages casually in offer letters. Make equity conditional on formal approval and signed documents.

If you'd like help with choosing between EMI options and an LTIP, preparing your employee share option documents, checking your shareholders agreement or setting up the right approvals, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.