When EMI is not available
Enterprise Management Incentive (EMI) options carry the most generous tax treatment of any UK share scheme, and our EMI share options page sets out how they work. They come with conditions on the company and on each person who holds them, and a growing startup can fail one of those conditions for some or all of its team.
The company cannot grant EMI options if any of these apply.
- It has 500 or more full-time equivalent employees, or gross assets of more than £120 million (the limits for options granted from 6 April 2026).
- Another company controls it, for example after it has been bought.
- Its trade is excluded, which covers activities such as banking and other financial activities, leasing, property development, farming and legal or accountancy services.
- Its EMI options already outstanding are worth £6 million, measured at the value of the shares when each option was granted.
A person cannot hold EMI options if they are not an employee, if they work for the company for less than 25 hours a week and less than 75% of their total working time, or if they already hold more than 30% of the company. That rules out most non-executive directors, advisers, consultants and part-time specialists. Each employee is also limited to £250,000 of EMI options in any three-year period.
Staff overseas raise a separate question. EMI and the other UK schemes give UK tax advantages, and someone who lives and works in another country is taxed on their options under that country's rules.
The alternatives are a Company Share Option Plan (CSOP), unapproved options and growth shares.
What this guide covers
- When a company or a person cannot use EMI
- Company Share Option Plan (CSOP) options up to £60,000
- Unapproved options for advisers, non-executives and overseas staff
- Growth shares, and a comparison table of all four
Company Share Option Plan options
A Company Share Option Plan, usually shortened to CSOP, is the other UK share option scheme with tax advantages. It has no limit on the company's size or employee numbers and no list of excluded trades, so a company that has outgrown EMI or works in an excluded trade can often use it.
Who can have CSOP options
Options can go to employees and full-time directors of the company or its group. A person cannot take part if they hold, or held in the previous 12 months, more than 30% of a close company whose shares are under option. The shares must be fully paid, non-redeemable ordinary shares, and they must be listed, in a company that is not under the control of another company, or in a company owned by an employee ownership trust.
The £60,000 limit
Each person can hold CSOP options over shares worth up to £60,000, measured at their market value on the date of grant. The limit was £30,000 for options granted before 6 April 2023. CSOP options also count towards the same person's £250,000 EMI limit, so an employee who holds both cannot go beyond £250,000 in total.
How CSOP options are taxed
The exercise price must be at least the market value of the shares on the date of grant.
- Grant: no income tax or National Insurance.
- Exercise: no income tax or National Insurance if the option is exercised between three and ten years after it was granted. Exercise within three years is also free of income tax if the holder leaves because of injury, disability, redundancy or retirement and exercises within six months of leaving, or if the company is bought for cash and the conditions in section 524 of the Income Tax (Earnings and Pensions) Act 2003 are met. Outside those cases, the gain at exercise is taxed as employment income.
- Sale: the gain is a capital gain, taxed at 18% within the basic rate band and 24% above it in 2026/27, after the £3,000 annual exempt amount. Business Asset Disposal Relief is only available if the holder meets the normal tests, which include holding at least 5% of the ordinary shares and votes.
The scheme must be registered with HMRC, with a self-certification that it meets the rules, by 6 July after the end of the tax year in which it was set up, and an annual return is due by 6 July every year. HMRC will agree the market value of the shares before grant if you write to its Shares and Assets Valuation team with a proposed value and the last three years' accounts.
Unapproved options
An unapproved option is a share option with no tax advantages. It can be granted to anyone, on any terms, for any number of shares, which makes it the usual choice for non-executive directors, advisers, staff above the EMI or CSOP limits and staff overseas. One plan with a separate schedule of terms for each country lets the same documents cover people in several countries.
How unapproved options are taxed
- Grant: no income tax.
- Exercise: the difference between the market value of the shares and the price paid is employment income, taxed at 20%, 40% or 45% in England, Wales and Northern Ireland, or at the Scottish rates. If the shares can be turned into cash straight away, for example because the company is being sold, they count as readily convertible assets. The company then deducts the income tax through payroll, and employee National Insurance (8%, or 2% on earnings above £50,270) and employer National Insurance at 15% are due as well. The option agreement can pass the employer's National Insurance to the option holder through a joint election approved by HMRC.
- Sale: any further growth after exercise is a capital gain. The amount taxed as income at exercise is added to the cost of the shares, so it is not taxed twice.
Unapproved options and growth shares are reported on the company's return for other employment-related securities. That return is registered by 6 July after the tax year of the first reportable event and filed by 6 July each year.
Advisers and consultants
The employment income rules above apply to employees and directors, including non-executive directors, because a directorship is an office. A self-employed adviser who is given options as payment for their services is taxed under the rules for their business income. Check how each person is engaged before you draft their option agreement.
Growth shares
A growth share is a separate class of share that only takes value above a set level, called the hurdle. The hurdle is usually set at or above the company's current value. If the company is worth £10 million and the hurdle is £15 million, the growth shares share in the value above £15 million on a sale. Because they have no value unless the company grows past the hurdle, they are worth much less today than ordinary shares, and an employee can often afford to pay their full value at the start.
The employee owns shares from day one. There is no exercise, so the gain is taxed as a capital gain on sale, provided the employee paid the full value when they acquired the shares. Growth shares suit a company that cannot use EMI and wants its team's gains taxed as capital gains.
How growth shares are taxed
- Acquisition: if the employee pays at least the unrestricted market value of the shares, which is their value ignoring restrictions such as forced sale on leaving, there is no income tax. Any shortfall is employment income. The employee and the company should sign a section 431 election within 14 days of the shares being acquired, so that later growth is not taxed as income because of those restrictions.
- Sale: the gain is a capital gain at 18% or 24% after the £3,000 annual exempt amount. Business Asset Disposal Relief needs the normal 5% tests to be met, which a small holding of growth shares will not usually meet.
The value of growth shares depends on a careful valuation of the hurdle, the company's prospects and the rights of each share class, and HMRC's advance valuation service covers shares under the EMI, CSOP, SIP and SAYE schemes, so a growth share value is not agreed with HMRC before the shares are issued. The company's articles must be changed to create the new class. Our share structure page covers share classes and the cap table.
How the four compare
| EMI options | CSOP options | Unapproved options | Growth shares |
|---|
| Who can receive them | Employees working 25 hours a week or 75% of their working time | Employees and full-time directors | Anyone | Anyone, usually employees and directors |
| Company limits | Fewer than 500 employees, gross assets up to £120m, qualifying trade, independent | Independent or listed, no size or trade test | None | None |
| Limit for each person | £250,000 in three years | £60,000 | None | None |
| Tax at grant or acquisition | None | None | None | Income tax on any shortfall below full value |
| Tax at exercise | None if the price is at least market value at grant | None if exercised after three years, or in the leaver and takeover cases | Income tax, and National Insurance if the shares can be sold straight away | No exercise |
| Tax on sale | Capital gains tax, with Business Asset Disposal Relief at 18% after two years | Capital gains tax at 18% or 24% | Capital gains tax on growth after exercise | Capital gains tax at 18% or 24% |
| Value agreed with HMRC before grant | Yes, form VAL231 | Yes, by writing to HMRC | No | No |
Worked example comparing the three
The figures below are illustrative and use 2026/27 rates for England. A company that runs a lending platform cannot use EMI because money-lending is an excluded trade. It wants to give its head of engineering, who earns £130,000 a year, a share of the company. Its ordinary shares are worth £2 each.
Unapproved options
The engineer is granted unapproved options over 10,000 shares at £2 each. Four years later the company is sold for £12 a share. The engineer exercises just before the sale and sells at once.
- Gain at exercise: (£12 − £2) × 10,000 = £100,000, taxed as employment income.
- Income tax: all of it falls above £125,140, so £100,000 × 45% = £45,000.
- Employee National Insurance: £100,000 × 2% = £2,000.
- The engineer pays £47,000 in total. The company pays employer National Insurance of £15,000 unless the agreement passed it to the engineer.
CSOP options
The same grant fits within the £60,000 CSOP limit, because 10,000 shares at £2 are worth £20,000 at grant. The option is exercised four years after grant, so there is no income tax at exercise.
- Capital gain: £120,000 − £20,000 = £100,000.
- Less the £3,000 annual exempt amount: £97,000.
- Capital gains tax at 24%: £23,280.
Growth shares
Instead, the engineer buys 10,000 growth shares with a hurdle of £2 a share, paying their full unrestricted market value of £0.40 each, which is £4,000, and signs a section 431 election. On the sale each growth share is worth £10, the value above the hurdle.
- Capital gain: £100,000 − £4,000 = £96,000.
- Less the £3,000 annual exempt amount: £93,000.
- Capital gains tax at 24%: £22,320.
On these figures the engineer pays £47,000 with unapproved options, £23,280 with CSOP options and £22,320 with growth shares, plus the £4,000 paid for the growth shares at the start.
The company's corporation tax deduction
When shares are acquired by exercising EMI, CSOP or unapproved options, the company can deduct their market value less the price paid from its taxable profits. In the example, that is £100,000 for either type of option, worth £25,000 at the 25% main rate. With growth shares paid for in full there is no amount to deduct. Our guide to share options when someone leaves or the company is sold sets out the conditions.
Help choosing and setting up a scheme
We check whether the company and each person qualify for EMI, and where they do not, compare CSOP, unapproved options and growth shares on the figures for your company. Setting up an EMI scheme is £2,950 + VAT, including the valuation agreed with HMRC, and £295 + VAT a year for the annual return. A share structure, including a new share class, is £750 + VAT and £195 + VAT for each later share issue. Other schemes are quoted in writing before work starts. Our pricing page lists all our fees.
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