EMI’s reputation rests on a single elegant outcome: an employee can carry value from option grant to company exit and meet the taxman only once — at capital gains rates, possibly the reduced 14% BADR rate. But the path has branches: discounted grants, disqualifying events, early exercise versus exit-only. This guide walks every branch with current-year numbers, so you can locate your own situation precisely.
At grant: silence
No income tax, no NI, no entry on your Self Assessment. The company notifies HMRC of the grant; your only job is to file the agreement somewhere you’ll find it in five years. (If you don’t know whether your exercise price equals the HMRC-agreed market value, ask now — that one fact selects your branch at exercise.)
At exercise: the clean case and the discount case
Granted at or above market value (most grants)
Exercise triggers no income tax and no National Insurance, however far the shares have climbed. You pay the exercise price, receive shares, and your CGT base cost is set: exercise price (plus nothing else, since nothing was income-taxed).
Granted at a discount
Tax at exercise applies to the discount only — broadly, agreed market value at grant minus your exercise price (capped by the actual gain). Everything the shares gained between grant and exercise remains untouched until sale. If the shares are “readily convertible” (a sale is in progress, or a market exists), the discount goes through PAYE with employee NI at 8%/2%; otherwise it’s reported via Self Assessment without NI. Your CGT base cost becomes exercise price + the discount already taxed — the system never taxes the same pound twice.
At sale: capital gains, and the BADR prize
Selling EMI shares is a CGT event. For 2025/26:
- Gain = proceeds − (exercise price + any amount taxed as income at exercise).
- Annual exempt amount: the first £3,000 of your total gains in the year is tax-free.
- Main CGT rates: 18% within your basic-rate band, 24% above it.
- Business Asset Disposal Relief: 14% on qualifying gains in 2025/26 (legislated to rise to 18% from 6 April 2026), up to the £1 million lifetime allowance. For EMI shares the usual 5% shareholding tests are disapplied: you qualify when the option was granted at least 2 years before disposal and you remained an employee/officer of the company through to sale.
The full ladder, with numbers
Tom holds EMI options over shares, exercise price £2.00 (the agreed value at grant). The company sells 3 years later at £10.00. He exercises and sells 20,000 shares on completion.
- Exercise: cost £40,000; income tax/NI: £0.
- Gain: £200,000 − £40,000 = £160,000; minus £3,000 AEA → £157,000 chargeable.
- BADR (option held 3 years, employed throughout): 14% × £157,000 ≈ £21,980.
- Net of all tax: ≈ £138,000 on a £160,000 profit — an effective ~13.7%. The same gain via an unapproved option could have suffered income tax at 40-45% plus NI at exercise. The structure, not the stock, made the difference.
Disqualifying events: how the split works
When a disqualifying event occurs — employment ends, hours fall below the 25-hour/75% test, the company loses independence or its qualifying trade — a 90-day clock starts. Exercise within it and full EMI treatment is preserved. Exercise later and the rules split the value: growth up to the event keeps EMI treatment; growth after the event is taxed as employment income at exercise (with NI where shares are readily convertible). Practical translations: leaving a private startup whose agreement allows post-departure exercise often means a use-it-or-lose-the-tax-break decision within three months; a company simply growing past 250 employees or £30m assets does not disqualify existing options (those tests apply at grant) — but being acquired can, which is why exits are normally choreographed so option holders exercise on completion, inside any window.
Early exercise vs exit-only: the risk dimension
Where your agreement permits exercising vested options before any exit, you can start the BADR employment clock as a shareholder, capture dividends if any, and bank certainty against disqualifying events — at the price of real cash at risk in an illiquid company (and a capital loss, not a refund, if it fails). Exit-only structures remove the risk and the choice: exercise and sale happen together, the maths is known on the day, and BADR’s 2-year test runs from grant, so patience alone usually secures it. Neither is wrong; just price the risk honestly rather than treating exercise as a free tax optimisation.
Reporting: your half of the paperwork
- Exercise (clean case): nothing to file personally.
- Exercise (discount/post-event income): usually handled via PAYE when shares are readily convertible; otherwise the income goes on your Self Assessment for that year.
- Sale: report the gain in the capital gains pages of Self Assessment for the tax year (6 April–5 April) of disposal; claim BADR there. Keep: option agreement, valuation reference, exercise statement, completion statement.
- Deadlines: online Self Assessment by 31 January following the tax year; consider payments on account if a large gain creates one.
One-page record to keep from day one: grant date · agreed AMV/UMV · exercise price · vesting terms · any disqualifying event + date · exercise date + cost · sale date + proceeds. Every tax question you will ever face about your EMI option is answered by that line of data.
Key takeaways
- Grant: no tax, nothing to report personally. Exercise at/above the HMRC-agreed value: no income tax, no NI.
- Exercised at a discount to the agreed value? Only the discount is taxed as employment income at exercise — growth since grant stays untaxed until sale.
- Sale: CGT applies to proceeds minus exercise price (plus any amount already taxed), after the £3,000 annual exempt amount; main rates are 18%/24% for 2025/26.
- Business Asset Disposal Relief taxes qualifying EMI gains at 14% (2025/26; rising to 18% from April 2026) when 2+ years separate grant and sale — no 5% shareholding needed for EMI.
- Disqualifying events split the tax: exercise within 90 days preserves treatment; afterwards, post-event growth becomes income-taxable.
Frequently asked questions
Do I pay National Insurance on EMI gains?
Not on a market-value EMI exercised normally: no income tax and no NI at exercise, and capital gains are outside NI entirely. NI (and income tax via PAYE) can appear only where a discount or post-disqualifying-event growth is taxed as employment income on readily-convertible shares.
How do I report an EMI sale to HMRC?
Through Self Assessment's capital gains pages for the tax year of sale (or HMRC's real-time CGT service). You'll need exercise date, exercise cost, sale proceeds, and any amounts already taxed as income. Companies file their own annual EMI returns; that doesn't replace your personal reporting of gains.
What if I sell at a loss?
Selling shares for less than your exercise cost creates a capital loss, claimable against other gains. With exit-only exercise (exercise and sale simultaneous at a known price), losses are rare; with early exercise and a later failed company, they're real — one reason early exercise is a risk decision, not just a tax one.
Does BADR really not require 5% ownership for EMI?
Correct — the usual 5% 'personal company' tests are switched off for shares acquired via EMI options. What remains is the time test (option granted 2+ years before disposal, with employment through that period) and BADR's £1m lifetime gains cap, with relief claimed via Self Assessment.
Educational disclaimer: This guide is general information, not financial, investment, tax or legal advice. Figures refer to the tax years stated and change over time; rules differ by jurisdiction and personal circumstances. Verify current figures with the IRS / HMRC and consult a qualified professional before acting. See our full disclaimer.