What Are Employee Share Options? Easy Guide for You

Attracting and retaining top talent in the UK tech landscape remains one of the greatest challenges for startup founders.

While competitive salaries are important, equity participation through share options has become an essential component of the compensation package for many tech companies.

But not all share option schemes are created equal, particularly when it comes to tax efficiency.

This is why understanding the difference between HMRC-approved and unapproved schemes could save your employees thousands in tax and significantly enhance the attractiveness of your equity incentives.

In this blog post, I’m going to address the different employee share options available and the impact of the HMRC valuation on them.

Let’s dive in then!

What Are Share Options? 

Share options give employees the right to purchase shares in your company at a pre-determined price (the “exercise price”), typically at some point in the future.  The value to employees comes when the market value of the shares increases above the exercise price, allowing them to acquire shares worth more than they pay for them.  For tech startups, options serve multiple purposes: 

• Aligning employee interests with company growth 
• Conserving cash while offering competitive compensation 
• Creating a sense of ownership and belonging 
• Incentivising long-term commitment 

Approved vs Unapproved: Key Comparison 

Scheme Type	Maximum Value	Tax on Grant	Tax on Exercise	Tax on Sale	Company Size Limit
EMI	£250,000 per employee	None	None (if at market value)	CGT (potentially 10%)	<250 employees, <£30m assets
CSOP	£60,000 per employee	None	None (if held >3 years)	CGT	No limit
Unapproved Options	Unlimited	None	Income tax & NICs	CGT	No limit
Growth Shares	Unlimited	None (if purchased at value)	N/A	CGT	No limit

Approved Schemes 

HMRC-approved schemes include: 

1. Enterprise Management Incentives (EMI) 

EMI schemes are specifically designed for smaller, higher-risk companies and offer the most favourable tax treatment of any UK share scheme. For the 2025/26 tax year: 

• Companies must have gross assets under £30 million and fewer than 250 employees 
• No income tax or National Insurance Contributions (NICs) arise on grant 
• No income tax or NICs on exercise if options granted at market value 
• Capital Gains Tax (CGT) on disposal, potentially at just 10% with Business Asset Disposal Relief 
• Annual option grants up to £250,000 per employee 

2. Company Share Option Plan (CSOP) 

For companies that don’t qualify for EMI, CSOP offers an alternative approved route: 

• Options up to £60,000 per employee 
• No income tax or NICs on the grant 
• No income tax or NICs on exercise if held for three years and exercised within ten years 
• CGT on disposal 

Unapproved Schemes 

Unapproved schemes include: 

1. Unapproved Share Options 

• No limit on option value 
• No restrictions on company size or type 
• Income tax and NICs due on exercise (on the difference between the market value and the exercise price) 
• Potential additional CGT on disposal 

2. Growth Shares 

While not technically options, growth shares are another form of equity incentive: 

• New class of shares that only participate in future growth 
• Minimal tax on acquisition if purchased at fair market value 
• Future growth taxed under CGT rather than income tax 
• Can be highly tax-efficient if properly structured 

The Importance of HMRC Valuation 

Securing HMRC approval for your company’s valuation is a crucial step in implementing an EMI scheme. Ideally, you want to establish a valuation that is: 

• Defensible to HMRC 
• At the lower end of any reasonable range 
• Reflective of your company’s current status 

Benefits of a Lower Valuation 

A lower HMRC-approved valuation offers several strategic advantages: 

1. Enhanced Employee Benefits: Lower exercise prices mean greater potential gains for employees 
2. Tax Efficiency: More of the growth will be taxed as capital gains rather than income 
3. More Attractive Package: Larger potential upside makes your equity offering more compelling for recruitment 
4. Optimised Option Pool: Grant more options within the same overall pool value 

How EMI Valuation Works 

For privately-held tech startups, valuation typically involves:  1. Valuation Methods: 

• Recent investment rounds (often with a discount) 
• Revenue or earnings multiples 
• Discounted cash flow analysis 
• Comparable company benchmarking 

2. Discounts Applied: 

• Minority shareholding (non-controlling interest) 
• Lack of marketability 
• Early-stage risk factors 

3. HMRC Submission Process: 

• Prepare a detailed valuation report 
• Submit to HMRC’s Shares and Assets Valuation team 
• Receive agreement (typically within 2-4 weeks) 
• Valid for 90 days for granting options 

The Vesting Journey: How Options Mature 

Vesting determines when employees can exercise their options. Most tech startups use: 

• 4-year vesting with 1-year cliff: No vesting for 12 months, then 25% vests, followed by monthly or quarterly vesting 
• Milestone-based vesting: Tied to company or individual performance targets 
• Acceleration clauses: Full or partial vesting upon acquisition 

Tax Implications: A Comparison for 2025/26 

To illustrate the difference in tax treatment, let’s consider an example for the 2025/26 tax year:  An employee is granted options to purchase 10,000 shares at £1 per share (the current market value). Five years later, they exercise when the shares are worth £5 each, and sell a year later at £6 per share. 

Under an EMI scheme: 

• No tax on grant 
• No tax on exercise 
• CGT on the £50,000 gain when sold (potentially at 10% with Business Asset Disposal Relief) 
• Total tax: £5,000 

Under an unapproved scheme: 

• No tax on the grant 
• Income tax (up to 45%) and NICs (2%) on the £40,000 gain at exercise 
• CGT on the £10,000 further gain when sold 
• Total tax: up to £19,800 

The difference is substantial and highlights why approved schemes, particularly EMI, are so attractive for tech startups. 

Strategic Considerations for Tech Founders 

When implementing share option schemes, consider these strategic factors: 

1. Company Eligibility 

• Does your startup qualify for EMI? This should be your first choice if eligible 
• Would a CSOP work as an alternative if EMI isn’t available? 
• Is your business in a qualifying trade? (Most tech businesses qualify, but some activities are excluded.)

2. Valuation Strategy 

• Seek HMRC agreement on valuation before granting options 
• Consider timing – implement before significant value increases 
• Understand what documentation you’ll need to support your valuation 

3. Vesting Structures 

• Time-based vesting (typically 3-4 years with a 1-year cliff) 
• Performance-based vesting (linked to company or individual targets) 
• Exit-based vesting (tied to acquisition or IPO) 

4. Communication 

• Clearly explain the value of options to employees 
• Provide regular updates on company valuation 
• Educate on tax implications and exercise strategies 

Common Pitfalls to Avoid 

In our experience working with tech startups, we frequently see these mistakes: 

1. Delaying implementation – Setting up a scheme too late can mean missing out on favourable valuations 
2. Overlooking advance assurance – While not mandatory, HMRC advance assurance provides certainty 
3. Poor documentation – Ensuring option agreements are properly drafted and executed is crucial 
4. Ineffective communication – Many employees don’t understand the value of their options 
5. Failing to review regularly – As your company grows, your scheme may need updating 

Next Steps for Your Startup 

If you’re considering implementing a share option scheme, we recommend: 

1. Assess your company’s eligibility for approved schemes 
2. Consider the timing – earlier implementation often means better valuation 
3. Seek professional advice on scheme design and implementation 
4. Prepare clear communication materials for employees 
5. Build regular reviews into your calendar 

By thoughtfully implementing the right share scheme for your tech startup, you create a powerful tool for aligning your team with your company’s success while offering them significant financial upside in a tax-efficient manner.  Note: This blog post is intended as general guidance only and does not constitute tax advice. Tax rules and rates are subject to change, and you should consult with a qualified advisor for advice specific to your circumstances.