Why startups offer employees share options
An early-stage company often competes for staff with larger businesses that can pay higher salaries. Share options give employees a share in the value of the company if it grows, so the people who help build it benefit when it succeeds. Enterprise Management Incentives (EMI) is the government scheme that gives share options in smaller companies favourable tax treatment.
If the scheme is set up correctly, an employee pays no income tax when the option is granted, normally none when they exercise it, and Capital Gains Tax, often at a reduced rate, when they sell the shares. If the options do not meet the rules, or are not reported to HMRC on time, the tax advantages are lost.
What this guide covers
- What an EMI share option is
- Whether your company and your employees qualify
- How the options are taxed when granted, exercised and sold
- The paperwork, including the HMRC notification due by 6 July after the tax year of grant
What an EMI share option is
A share option is the right to buy a share later at a price fixed today. Say you grant an employee an option over 1,000 shares at £1 each, which is the exercise price. Until they use the option they own no shares and have paid nothing. If the shares are worth £50 each when the company is sold, they exercise the option, pay £1,000 for shares worth £50,000 and make a gain of £49,000 before tax. If the shares never become worth more than £1 each, the employee lets the option lapse without paying anything.
Does your company qualify?
To grant EMI options, your company must broadly:
- Be an independent trading company that is not controlled by another company
- Have fewer than 500 full-time-equivalent employees
- Have gross assets of £120m or less
- Carry on a qualifying trade (most trades qualify, but some are excluded, such as banking, property development, farming and legal or accountancy services)
The options themselves are limited to £250,000 per employee in any three-year period, measured by the value of the shares at grant, and £6m across the whole company. Options keep their tax advantages if they are exercised within 15 years of being granted. A company with its registered office in Northern Ireland whose trade involves goods or electricity keeps the older limits of fewer than 250 employees, £30m of gross assets, £3m of options and 10 years to exercise.
Check the full list of excluded trades before you promise anyone EMI options, particularly if the company works in property, finance, or legal or accountancy services. Options granted by a company whose trade is excluded do not qualify for EMI.
Do your employees qualify?
EMI options can only be granted to employees. To hold them, a person must:
- Work for the company (or a qualifying subsidiary) for at least 25 hours a week, or if less, at least 75% of their total working time
- Not hold more than 30% of the company's shares already
The working-time test means EMI suits full-time employees, including a founding team's first hires. A freelance developer is not an employee, and someone who works for you two days a week alongside another job is unlikely to meet the test.
How EMI options are taxed
This is how an EMI option is taxed at each stage.
- At grant: no income tax or National Insurance.
- At exercise: no income tax or National Insurance if the exercise price is at least the market value the shares had when the option was granted. If the option was granted at a discount, income tax is due on the difference between what the employee pays and what the shares were worth at grant, with National Insurance as well if the shares can easily be sold.
- On sale: any gain is taxed as a capital gain. It often qualifies for Business Asset Disposal Relief, which taxes gains at 18% on sales from 6 April 2026, as long as the option was granted at least two years before the sale. Without the relief, Capital Gains Tax is 18% on gains that fall within the basic rate band and 24% above it.
A cash bonus is taxed as income, at 20%, 40% or 45% in England, Wales and Northern Ireland, plus National Insurance for both the employee and the employer.
In this illustrative example, an employee is granted options over shares worth £10,000, with an exercise price of £10,000. Three years later the company is sold and the shares are worth £110,000. The employee exercises the options, paying £10,000, and sells the shares for £110,000, a gain of £100,000. If the gain qualifies for Business Asset Disposal Relief, the tax is £17,460, which is 18% of £97,000 (the £100,000 gain less the £3,000 annual tax-free allowance for 2026/27). Paid instead as a £100,000 bonus to a higher-rate taxpayer, the same amount would cost the employee at least £42,000 in income tax at 40% and National Insurance at 2%.
EMI paperwork and HMRC deadlines
The tax advantages depend on the paperwork being right, particularly these two steps.
- Agreeing a market value with HMRC. You can ask HMRC to agree the market value of your shares before you grant the options. An agreed value normally lasts 90 days, as long as nothing happens in the company that changes the value, and granting at or above it within that time protects employees from a later income tax charge on a discount. We recommend agreeing the value before every grant, although it is optional.
- Reporting the grant to HMRC in time. Every EMI option grant must be reported to HMRC through its online service for employment-related securities (shares and options people get through their job) by 6 July following the end of the tax year in which the options were granted. Options reported after that date are not EMI options and lose the EMI tax treatment. You also file an annual return for the scheme by 6 July each year while the scheme is running.
Each employee also needs a written option agreement setting out the exercise price, the number of shares and the vesting conditions, which decide when the options can be used. A common pattern is vesting over four years, so the employee earns the options by staying with the company.
How funded startups use EMI
For a company that has raised money or is about to, EMI helps it hire senior people it could not afford on salary alone, and it ties the team's reward to the sale or growth that investors are looking for. Options only pay out if the company does well, and granting them uses no cash. A pool of shares set aside for options is common in venture-backed UK startups, and investors often expect to see one.
Raising money, hiring and granting share options often happen at the same time. Our posts on SEIS and EIS for founders and your first hire and payroll cover the other two.
Before you grant options
Check that the company and each employee meet the qualifying tests, agree the share value with HMRC, and put the 6 July reporting deadline in the diary. Our EMI share options page sets out how we set up a scheme and what it costs.
