YF Accounting15 min read
Employee share schemes let you offer your team a genuine stake in the business they are helping to grow — and HMRC actively rewards the well-structured versions with some of the most generous tax breaks available to UK companies. Done right, an equity scheme turns a salary into a co-ownership arrangement: your people win when the business wins, they tend to stay longer, and the company typically ends up with a corporation tax deduction worth more than you spent on setup.
This guide covers every UK tax-advantaged share scheme for 2026/27 — EMI, CSOP, SIP, SAYE and growth shares — with plain-English explanations of what each one does, who it suits, the tax treatment on both sides, and the steps to set one up without falling into the most common traps.
Why give staff equity? The business case for share schemes
The financial argument is fairly simple: shares let you compete for talented people when your cash salary cannot. A software developer or senior hire who might otherwise go to a larger employer may accept a lower salary if the share package is credible and the upside is real. Once they hold options, they have a direct financial reason to care about the company’s performance — and to stay until the options vest.
The retention mechanism is built in. Most schemes have a vesting schedule — typically three or four years — meaning the employee only realises the full value if they stick around. This is significantly cheaper to operate than paying large retention bonuses out of profit.
The tax economics also work in your favour as the employer:
- No employer’s National Insurance on the gain when qualifying options are exercised — a 15% saving on every pound of employee gain at current rates
- Corporation tax relief on the same gain — the difference between exercise price and market value at exercise reduces your taxable profits. At the 25% main rate, £100,000 of employee gain produces a £25,000 tax saving
- Scheme setup costs — legal fees and accountancy costs are usually deductible against corporation tax
The downsides are real and worth naming upfront: you will dilute your own stake, there are legal and valuation costs to set up, HMRC filing obligations run permanently, and two of the four schemes require you to include all employees — not just the ones you want to target.
Do you need a Fractional CFO to run an employee share scheme?
Many small companies assume share schemes are only for funded startups with a proper CFO in place. They are not — but the setup does require strategic and technical coordination that goes beyond basic bookkeeping.
A Fractional CFO — or a chartered accountant providing similar advisory services — is often the most practical way for SMEs to access this. Rather than hiring a full-time finance director at £100,000+ per year, a fractional arrangement gives you CFO-level thinking on a fixed or part-time basis. For share schemes specifically, that means:
- Choosing the right scheme — which of the five options fits your company, headcount, trade and structure now, and will still fit after your next funding round?
- Managing the share valuation — coordinating with HMRC’s Shares Valuation team to agree a defensible market value before options are granted
- Drafting and submitting HMRC advance assurance — confirming your company qualifies before you spend money on legal documentation
- Integrating the scheme with your financial strategy — making sure the option pool works alongside investor rights, your Articles of Association and future fundraising plans
- Annual ERS compliance — Employment Related Securities returns must be filed with HMRC by 6 July each year; missing the deadline can disqualify options and create unexpected income tax bills for employees
- Briefing employees — a clear explanation of what the numbers mean and when tax applies prevents nasty surprises later
At YF Accounting, this kind of share scheme support sits within our fixed-fee service — you do not need a separate engagement letter every time you have a question. If you are weighing up whether a share scheme is worth it for your business, that conversation starts with a free intro call.
Enterprise Management Incentives (EMI): the standout option
If your company qualifies, use EMI. Nothing else comes close on a combination of flexibility, tax efficiency and practicality for smaller growing companies.
Who qualifies for EMI?
The company must:
- Be a trading company or the holding company of a trading group — certain trades are excluded
- Have fewer than 500 full-time equivalent employees at the time of grant (raised from 250 from 6 April 2026)
- Have gross assets of £120 million or less at the time of grant (raised from £30 million from 6 April 2026)
- Have a permanent establishment in the UK
- Be independent — not a 51% subsidiary of another company
Excluded trades include banking and financial services, leasing, property development and investment, legal and accountancy services, farming, and hotel or nursing home businesses. HMRC applies a roughly 20% threshold — if excluded activities represent less than 20% of total activities, the company still qualifies. If there is any ambiguity, settle it before granting options.
The 2026/27 EMI limits at a glance
| Limit | Amount |
|---|---|
| Company gross assets | Up to £120m |
| Company employees (FTE) | Fewer than 500 |
| Total unexercised options (company-wide) | Up to £6m |
| Options per employee | Up to £250,000 over any 3-year period |
| Maximum option term | 15 years |
How EMI tax actually works
Provided options are granted at market value:
- At grant: no income tax, no NI — for the employee or the employer
- At exercise: no income tax, no NI
- At sale: CGT at 18% (basic rate) or 24% (higher rate) in 2026/27, after the £3,000 annual CGT exemption
- With BADR: if at least 24 months have passed since the options were granted, BADR caps the rate at 18% on the employee’s first £1 million of lifetime qualifying gains — regardless of their income tax rate, and with no minimum shareholding required
Compare that with a salary increase or unapproved options, where income tax and NI together can take 42–47% before the employee sees a penny. EMI compresses that to 18% on the full gain.
If options are granted below market value, income tax and NI apply to the discount at exercise — which is why HMRC valuation agreement matters before a single option is granted.
Getting HMRC advance assurance
Advance assurance is optional but strongly recommended when there is any ambiguity about qualifying status. HMRC’s EMI team will confirm in writing that your company qualifies before you spend money on legal drafting. The application describes the company’s trade, structure, headcount and gross assets. Turn-around is typically 4–8 weeks. The cost is time, not money.
The share valuation
You must agree an Actual Market Value (AMV) with HMRC’s Shares Valuation team before granting options. The AMV fixes the exercise price — grant options at that price and there is no income tax at exercise. Where shares carry restrictions (drag-along clauses, forfeiture on departure), the Restricted Market Value (RMV) may be lower and can be used as the exercise price, but creates a slightly different CGT calculation at sale. Take advice on this before submitting the valuation.
Company Share Option Plans (CSOP): for companies that have outgrown EMI
CSOP is the right fallback when a company is too large — or in an excluded trade — for EMI. No company size restriction, and like EMI it is discretionary: you choose who participates.
Each employee can hold CSOP options over shares worth up to £60,000 at grant (doubled from £30,000 in April 2023). Options must be granted at market value. Provided the employee holds them for at least three years before exercising, there is no income tax or NI on the gain — just CGT on eventual sale.
The £60,000 cap is the real constraint. Many larger employers run unapproved options alongside a CSOP — the approved portion benefits from no NI and no income tax at exercise; the excess is taxed as employment income, but the company still gets a corporation tax deduction on it.
Share Incentive Plans (SIP): equity for your whole workforce
A SIP puts actual shares — not options — into an HMRC-approved trust. Unlike EMI and CSOP, a SIP must be available to all eligible employees on the same terms.
The four routes into a SIP
Free shares: The company awards up to £3,600 per employee per year. Corporation tax relief on the cost.
Partnership shares: Employees buy shares from gross salary — before income tax and NI — up to £1,800 a year or 10% of salary, whichever is lower. The tax saving is immediate.
Matching shares: Up to two free shares for every partnership share bought. The most powerful participation incentive.
Dividend shares: Dividends reinvested into further SIP shares, tax-free, up to £1,500 a year.
Tax on SIP shares
Keep shares in the plan for five years: no income tax, no NI on receipt. Withdraw early and the benefit claws back (fully if within three years; partially between three and five years). Keep shares in the plan until sale and there is no CGT either — the only HMRC scheme where CGT is truly eliminated.
Save As You Earn (SAYE): the savings-backed share option
Employees save £5 to £500 a month for three or five years, then use the pot to buy shares at a price fixed at the start — discounted by up to 20% below market value. No income tax or NI on the option gain at exercise. If the share price has fallen, employees take their savings back — no loss.
CGT applies on eventual sale. Two planning points worth spelling out to employees:
The 90-day ISA window: within 90 days of exercise, up to £20,000 of SAYE shares can be transferred into a Stocks & Shares ISA. Growth and sale inside the ISA is CGT-free. This is often the most tax-efficient exit route — and easy to miss.
Pension transfer: shares moved into a pension within the same window also escape CGT.
SAYE must be offered to all eligible employees on the same terms.
Growth shares: when HMRC schemes do not fit
Growth shares solve a specific problem: you do not qualify for EMI, CSOP limits are too low, and you still need to give meaningful equity to senior hires without triggering large income tax bills.
The mechanics: a new class of ordinary shares participates in value only above a hurdle — for example, anything above the current £5 million valuation. Because the shares are worth almost nothing on day one, employees can acquire them for a nominal sum without a significant income tax charge. Future growth above the hurdle is taxed as capital gains.
No HMRC conditions, no excluded trades, no approval process — but a credible independent valuation is non-negotiable, the legal drafting must be robust, and the Articles need amending. There are no statutory reliefs if HMRC disputes the valuation.
Unapproved options: maximum flexibility, maximum tax
Where no approved scheme fits, unapproved (non-tax-advantaged) options have no HMRC conditions to meet. The trade-off: the entire gain between exercise price and market value at exercise is subject to income tax and employee NI — potentially 47% for higher-rate taxpayers. Employer’s NI (15%) also applies unless transferred via joint election. Most commonly used alongside approved schemes to allow packages above the statutory limits.
Setting up an EMI scheme: what actually happens
- Eligibility check (1–2 weeks) — review trade, structure, headcount, assets; submit advance assurance if needed
- Scheme design (1–2 weeks) — agree pool size, vesting schedule, good and bad leaver rules
- Share valuation (4–8 weeks) — submit to HMRC Shares Valuation; usually the critical path item
- Legal documentation (1–3 weeks) — solicitor drafts option agreements with required statutory content
- Board approval and grant (1 day) — resolution passed; grant date starts the 24-month BADR clock
- HMRC notification (by 6 July following the grant tax year) — register and report through the ERS online service
- Ongoing maintenance — annual ERS returns, notifications on employee departures and disqualifying events, fresh valuations before new tranches
Realistic timeline: 8–14 weeks with advance assurance; 4–8 weeks without.
Six common EMI mistakes — and how to avoid them
1. Missing the ERS annual return deadline
The 6 July deadline is absolute — no extensions, no appeals. Miss it and options lose their EMI status; income tax and NI apply at exercise with no warning to the employee. Put this date in the diary on the day options are granted.
2. Granting options to contractors
Only employees with a contract of employment qualify. Consultants and freelancers are excluded — regardless of how they work. Granting them options in error means unapproved option tax treatment from day one.
3. Using a stale valuation
A HMRC-agreed valuation does not apply indefinitely. After a funding round, a major contract win, or any material change in company value, you need a fresh valuation before the next option grant. An outdated exercise price risks HMRC treating the gap as a below-market-value discount — taxable at exercise.
4. Not acting within 90 days of a disqualifying event
Certain events disqualify EMI options: a company acquisition, an employee leaving, the trade changing to an excluded activity, or a material variation of option terms. After a disqualifying event, employees have 90 days to exercise and retain full EMI tax treatment. Miss the window and income tax and NI apply from the disqualifying event date onwards.
5. Varying option terms informally
Adjusting the exercise price, vesting schedule or share count without proper legal treatment can amount to a cancellation and re-grant — resetting the BADR clock and potentially triggering a taxable event. Take advice before any amendment to option terms.
6. No good leaver / bad leaver provisions
Without clear written definitions, what happens when an employee leaves mid-vesting is uncertain — and disputes are expensive. Good leaver (illness, redundancy, retirement): typically pro-rata exercise allowed. Bad leaver (resignation, misconduct): typically company buys back unvested options at cost. Draft these before you grant a single option.
What share schemes mean for the company’s tax position
Corporation tax relief: The company receives a deduction equal to the gain employees make on exercise — the difference between exercise price and market value. Claimed in the accounting period options are exercised, this reduces taxable profits. At the 25% main corporation tax rate, £500,000 of employee gain generates a £125,000 tax saving for the company.
Employer’s National Insurance: None on the exercise of qualifying EMI, CSOP, SIP or SAYE options. At 15% from April 2025, the saving on a £100,000 employee gain is £15,000 — often more than the scheme’s annual running costs.
Setup costs: Legal, accountancy and HMRC valuation costs are generally deductible business expenses. Annual ERS returns are filed through HMRC’s ERS portal — the 6 July deadline aligns with year-end payroll filing season, so keep both on the same compliance calendar. For further reading on corporation tax, see our guide to accounts and corporation tax.
The employee’s perspective: what share options mean in practice
Employees often receive a grant letter with minimal explanation. A brief, honest summary at grant — and again when options vest — prevents the most common misunderstandings:
- Options are not shares: they are the right to buy shares at a fixed price. Value only materialises if the company grows above that price.
- Vesting means waiting: typically three to four years, often with a one-year cliff — nothing until month 12, then monthly or quarterly. Leaving before vesting usually means losing unvested options.
- Tax hits at sale, not at grant: for qualifying EMI options there is no tax event until shares are sold. Employees sometimes expect a bill at exercise — if the scheme is correctly set up, they will not get one.
- You need an exit to realise value: options only convert to cash at a company sale, buyback or (if listed) market sale. Options may remain unexercisable for years.
- Good leaver / bad leaver matters: make sure employees understand how their options are treated if they leave before the vesting schedule completes.
Which scheme fits your company? Side-by-side comparison
| EMI | CSOP | SIP | SAYE | Growth shares | |
|---|---|---|---|---|---|
| Company size | <500 FTE, ≤£120m assets | Any | Any | Any | Any |
| Who participates | Your choice | Your choice | All employees | All employees | Your choice |
| Per-employee limit | £250,000 options (3 yrs) | £60,000 options | £3,600 free + £1,800 partnership/yr | £500/month savings | None |
| Company pool | £6m | None | None | None | None |
| Income tax at exercise | None (at market value) | None (held 3+ years) | None (held 5+ years in plan) | None | Depends on structure |
| CGT on sale | Yes — 18%/24%; BADR 18% possible | Yes — 18%/24% | None if in plan at sale | Yes — ISA transfer available | Yes — 18%/24% |
| Employer’s NI | None | None | None | None | Depends on structure |
| HMRC advance assurance | Optional, recommended | Not available | N/A | N/A | N/A |
| Annual ERS filing | Yes (6 July) | Yes (6 July) | Yes (6 July) | Yes (6 July) | Yes if registered |
| Best for | Targeted retention, SME growth companies | Targeted retention, larger companies | Broad all-staff ownership | Broad savings-based ownership | Non-qualifying companies; complex structures |
Honest summary: if your company qualifies for EMI, use it. CSOP is the sensible plan B for larger companies. SIP and SAYE suit employers who want genuine all-staff ownership. Growth shares are the tailored solution when nothing off the peg fits.
Frequently asked questions
What is the most tax-efficient employee share scheme in the UK?
For qualifying companies, EMI. Options granted at market value attract no income tax or NI at grant or exercise, and gains on sale are taxed as capital gains — potentially at just 18% under BADR if options were granted more than 24 months before sale. No other scheme comes close for smaller trading companies.
What changed for EMI schemes in April 2026?
From 6 April 2026: employee limit raised from 250 to 500 FTE; gross assets limit raised from £30m to £120m; company option pool doubled from £3m to £6m; maximum option term extended from 10 to 15 years. The individual £250,000 per-employee limit is unchanged.
Do employees pay tax when they exercise EMI options?
Not if options were granted at market value — no income tax and no NI at exercise. If options were granted at a discount, income tax (and possibly NI) applies to the discount at exercise. CGT then applies when shares are eventually sold.
What is Business Asset Disposal Relief and how does it work with EMI?
BADR caps CGT at 18% on the first £1 million of lifetime qualifying gains. For EMI options, employees qualify if at least 24 months have passed between the option grant date and the date shares are sold. No minimum shareholding is required — a significant advantage over the ordinary BADR rules, which require 5% company ownership.
What is the CSOP limit in 2026/27?
Each employee can hold CSOP options over shares worth up to £60,000, valued at the date of grant. Options must be granted at market value and held for at least three years before exercise for the income tax and NI exemption to apply. There is no company size restriction.
Do I have to offer a share scheme to every employee?
Only SIP and SAYE must be offered to all eligible employees on similar terms. EMI, CSOP and growth shares are discretionary — you decide who participates and how much they receive.
What happens to EMI options if the company is sold?
A company acquisition is usually a disqualifying event. Employees have 90 days from the acquisition date to exercise their options and retain full EMI tax treatment. Many acquisition agreements include option acceleration provisions so employees can exercise before or promptly after the deal completes.
How much does it cost to set up an EMI scheme?
Legal fees for drafting option agreements typically run £1,500–£4,000+ depending on complexity. HMRC’s Shares Valuation service is free. Accountancy costs for scheme design, HMRC correspondence and ongoing ERS returns vary. Total setup is commonly £2,000–£6,000 — usually recovered quickly through NI savings on the first option exercise alone.
Can contractors participate in EMI?
No. Only employees with a contract of employment qualify for EMI. Contractors, freelancers and consultants are excluded regardless of their working pattern or how long they have worked with the company.
What happens to my EMI scheme if I raise investment?
A funding round does not automatically disqualify existing options, but new investors may require a fresh option pool as a condition of investment. You will also need a fresh valuation before granting further options post-round. If a new investor takes a 51% stake, that may be a disqualifying event — take advice before any major funding event.
Thinking about a share scheme for your team?
Most share schemes live or die on getting the setup right — the valuation, the documentation, the HMRC notifications and the annual compliance. Mistakes early in the process can disqualify the tax benefits entirely, leaving employees with an unexpected income tax bill and the company facing employer’s NI on gains it thought were exempt.
At YF Accounting, I help owner-managed companies work out which scheme fits and manage the whole process as part of a fixed-fee service. For companies that need Fractional CFO-level support alongside compliance — scheme design, investor interaction, valuations and ongoing ERS reporting — that sits within the same engagement. Limited companies from £50 a month, sole traders from £35, with one point of contact rather than a call centre.
Book a free intro call or ring 0161 531 0959 and we can talk through whether EMI — or anything else — makes sense for your company.
This article is general information, not personal tax advice. For advice on your own situation, please get in touch.
Founder of YF Accounting — a fixed-fee, fully digital accountancy practice in Manchester serving SMEs, sole traders and landlords across the UK. One point of contact, unlimited support, no surprise bills.
Related reading
Companies House Identity Verification: What Every UK Director Must Do in 2026
Tax on Rental Income: What UK Landlords Pay in 2026/27
Filing Your 2025/26 Tax Return Early: Six Good Reasons Not to Wait for JanuaryThis article is part of our Payroll & PAYE guide. See the full topic for related reads.