Our option plan rules can be used to grant EMI options and non-qualifying options. If your company is not eligible to grant EMI options, we can also create a non-qualifying option scheme for you.
Non-qualifying options would be useful to reward employees who do not qualify for EMI options such as those who own more than 30% of the shares in the company, or work for the company for less than 25 hours a week or less than 75% of their paid working time.
Non-qualifying options do not have the tax advantages of EMI options:
- On exercise of a non-qualifying option, income tax and National Insurance contributions will be charged on the value of the shares less the exercise price. Income tax will be at 40% for higher rate taxpayers (taxable income above £50,270). Additional rate taxpayers (taxable income above £125,140) will pay 45% income tax.
- Further tax will be due when the shares are sold, generally at 20% on any capital gain above the annual exempt amount of £3,000 for higher and additional rate taxpayers.
If non-qualifying options are exercised, you may also want to carry out a share valuation on the exercise date to make sure there is agreement on taxable earnings for employees.
Example: Lukas with an EMI option receives £31,400 more than Stephen with a non-qualifying option. Stephen also has had to pay £36,000 in income tax once he exercised his options, which is three years before he receives any money from the sale of shares. See the working out below which compares the situation between the holding of an EMI option and a non-qualifying option.
| EMI option | Non-qualifying option | |
| Salary | Lukas, on £70k | Stephen, on £70k |
| Exercise Price | £10,000 | £10,000 |
| Value of the shares on the exercise date (assumed 4 years after grant) | £100,000 | £100,000 |
| Taxable earnings on the exercise date | £0 | £90,000 (ie £100,000 – £10,000) Income tax rate: 40% * The company will have to make payment to HMRC for PAYE, Employers National Insurance, and any Employees National Insurance |
| Sale price of the shares (assumed 3 years after exercise) | £150,000 | £150,000 |
| Capital gain | £140,000 (ie £150,000 – £10,000) CGT: 10% but £3,000 is tax free* | £50,000 (ie £150,000 – £100,000) CGT: 20% but £3,000 is tax free* |
| Tax calculation | Exercise: £0 Sale: £137,000 x 10% = £13,700 | Exercise: £90,000 x 40% = £36,000 Sale: £47,000 x 20% = £9,400 |
| Total tax | £13,700 (9% of sale price) | £45,400 (30% of sale price) |
| Net amount received | £126,300 | £94,600 |
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Please Note: This article contains general information only and Simply Equity is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. This article is not a substitute for professional advice and should not be used as such. Simply Equity does not assume any liability for reliance on the information provided in this article