Giving employees a stake in your business is one of the most effective ways to keep them motivated and aligned with the company's long-term goals. Share-based rewards are among the most common tools for achieving this.

Share options have been widely used for decades. In recent years, many larger or global businesses have moved towards Restricted Stock Units (RSUs). However, share options, particularly through the Enterprise Management Incentive (EMI) scheme, remain a powerful and highly tax-efficient choice, especially for UK private companies and SMEs.

This article explains how share options work, how they are taxed, what the main HMRC-approved schemes offer, and how they compare to RSUs.

 

Why Equity? The Problem it Solves

 

Cash bonuses are taxed as income and forgotten within a year. Salary increases are recurring costs. Neither creates lasting alignment between your team and the long-term success of the business.
Share options are different. They give employees the right to buy shares in the future at today’s price. If the business grows, the gap between today’s price and tomorrow’s value is theirs to gain. They only benefit if you both succeed.

This creates three things that cash alone rarely does:

• A direct financial link between individual performance and business outcomes.
• A reason to stay, particularly through a vesting period.
• A shared interest in the exit or long-term trajectory of the business.

 

Why Not Just Give Shares?

 

It seems simple, but giving shares outright creates immediate problems:

• The employee is taxed on the full value straightaway, as employment income.
• Both employee and employer national insurance (NIC) may be due.
• The employee faces a tax bill with no cash to pay it, since the shares cannot easily be sold.

For most businesses, outright share gifts are impractical. Share options solve this by deferring the tax event and, in approved schemes, taxing gains arising on a share sale under the capital gains tax (CGT) regime.

 

How Share Options Work

 

A share option gives an employee the right to buy shares at a fixed price, known as the strike price or exercise price, set at the time of grant.

If the business grows and the shares become worth more than the strike price, the employee buys them at the lower agreed price. The difference is their gain.

Options usually come with conditions. Employees may only be able to exercise them if:

• The company is sold or listed on a stock exchange.
• Agreed performance targets are met.
• The employee has stayed for a minimum period (a vesting period).

Until exercise, the employee holds no shares and has no voting or dividend rights. This keeps the cap table clean while the incentive remains live.

 

How Are Share Options Taxed: Unapproved vs Approved Options?

 

Unapproved Options 

 

Unapproved options are straightforward to set up but carry the highest tax cost. When an employee exercises the option, income tax applies to the gain (market value minus strike price). Where shares are Readily Convertible Assets (RCAs), employee NIC also applies, as does employer NIC at 15%, a cost that is often overlooked.

For private company shares without an established market, employee NIC does not apply on exercise, but income tax does. In some cases, employer NIC can be transferred to the employee by joint election, with the employee claiming relief for the employer NIC paid against their income tax liability arising on the share option exercise.

HMRC Approved Options

 

Approved schemes, structured correctly with the exercise price at least equal to market value at grant, deliver a very different outcome:

• No income tax or NIC on exercise.
• Tax only arises when the shares are sold.
• The gain on sale is taxed under the CGT regime, not income tax.

CGT rates are significantly lower than income tax rates. For 2026, CGT on shares is 18% (for basic rate taxpayers) and 24% (for higher or additional rate taxpayers), which can be compared to income tax rates of up to 45%.

 

Business Asset Disposal Relief (BADR)

 

Employees holding qualifying shares may be able to claim BADR, which reduces the CGT rate to 18% regardless of whether they are a higher rate taxpayer. For a higher rate taxpayer, this saves 6% on what can be a significant gain. 

The lifetime limit is £1 million of qualifying gains across all disposals.

BADR is available on EMI and CSOP shares, subject to conditions. It is generally not available on RSU gains. This is one of the clearest reasons why approved option schemes outperform RSUs for most employees in private businesses.

 

The Main Schemes Compared

 

EMI Schemes

 

EMI is the most tax-efficient share option scheme available. It is designed for independent private companies carrying on a qualifying trade.

From 6 April 2026, the qualifying conditions are:

• Fewer than 500 full-time equivalent employees (up from 250).
• Gross assets not exceeding £120 million (up from £30 million).
• Total unexercised EMI options not exceeding £6 million.
• The company must be independent, not a 51%+ subsidiary of another company.
• The company must carry on a qualifying trade. Excluded trades include property development, financial activities, farming, legal services, and accountancy.

At employee level, each individual can hold no more than £250,000 of unexercised EMI options by value at grant.

The tax outcome on exercise is no income tax or NIC arises. A subsequent sale of the shares will be taxed under the CGT regime, with BADR potentially reducing the rate to 18%.

From 6 April 2026, EMI options can remain unexercised for up to 15 years (up from 10). In most cases this can be applied retrospectively to existing options with proper documentation amendments.

Company Share Option Plans (CSOPs)

 

Company Share Option Plans (CSOPs) are often overlooked but worth serious consideration where a business does not qualify for EMI, for example because it exceeds the size thresholds or operates in an excluded trade.

Key features:

• Each employee can hold up to £60,000 of CSOP options (based on market value at grant).
• No income tax on exercise, provided the option is exercised at least three years after grant at a price set at market value.
• The gain on sale is taxed under CGT.
• No limit on the number of employees who can participate.

The three-year holding requirement limits flexibility compared to EMI, but a CSOP still delivers a meaningful advantage over unapproved options for businesses that cannot access EMI.

What About RSUs?

 

Restricted Stock Units (RSUs) are increasingly common in large or listed businesses. The employee is promised shares delivered over time with no exercise price. But the tax cost is higher: the full value at vesting is treated as employment income, with income tax, employee NIC, and employer NIC at 15% all applying.

RSUs offer certainty, employees receive value even if the share price stays flat, and they suit businesses that want a guaranteed reward rather than a performance-linked one. For most private companies, though, EMI or CSOP will deliver a better outcome for both sides.

 

Which Scheme is Best for Your Business?

 

A few questions to help you think through whether this is worth exploring:

• Do you have key employees who are critical to your growth plans?
• Are you finding it difficult to compete on salary with larger businesses?
• Is there a realistic prospect of an exit, trade sale, or investment event in the next five to ten years?
• Do you have fewer than 500 employees and gross assets under £120 million?
• Does your business carry on a qualifying trade?

If you answered yes to most of these, an EMI scheme is worth considering. If your business is larger or operates in an excluded trade, a CSOP may still deliver meaningful tax efficiency.

If you already have an EMI scheme in place, the April 2026 changes are worth reviewing. Existing options may be eligible for the extended 15-year exercise window if the documentation is properly amended.

Detail	EMI	CSOP	RSU
Tax on exercise	None	None (after 3 years)	Income tax and NIC
Tax on sale	CGT	CGT	CGT on further growth
BADR available?	Yes	Yes	Unlikely
Employer NIC on gain?	No	No	Yes (15%)
Company size limit	Up to 500 employees / £120m assets	No size limit	No size limit
Individual limit	£250,000 options	£60,000 options	No limit
Best suited to	SMEs and scale ups	Larger and excluded trade companies	Listed companies

 

A well-run EMI scheme involves several steps, but it is not as complicated as it can sound, as follows:

• Agree the market value of shares with HMRC’s Share and Assets Valuation (SAV) team.
• Draft the option agreements and scheme rules.
• Grant options and notify HMRC (from April 2027, this moves to the annual Employment Related Securities return).
• Monitor for disqualifying events and manage the 90-day window if one occurs.

We will handle all of this. The engagement starts with a straightforward conversation about your business, your people, and what you are trying to achieve. From there, we can usually confirm whether you qualify and outline the right structure within a couple of meetings.

 

What Next?

 

If you are considering rewarding employees with equity, now is a good time to review your options. The April 2026 changes to EMI open the scheme to a significantly wider range of businesses, and the comparison between EMI, CSOPs, and RSUs is worth revisiting carefully.

The right structure depends on your trading activity, your size, your exit timeline, and what you want employees to value. Getting the setup right from the outset, including agreeing valuations with HMRC and documenting the scheme correctly, is essential to securing the tax advantages.

James McLaughlin here at Sopher + Co advises owner-managed businesses and scale-ups on equity incentive schemes, working closely with clients from early-stage through to exit. Please contact James at Sopher and Co to arrange a no-obligation conversation.