Employee share schemes: a guide for UK businesses

What is an employee share scheme?

An employee share scheme is a way of giving employees a stake in your company. It’s a popular and potentially tax effective way to attract, retain and motivate employees.

Because employee share schemes don’t need immediate cash payments (unlike salaries or cash bonuses), this can make them ideal for start-ups or when cash is tight.

Employee share scheme benefits include:

• Incentivising employees to perform better,
• Attracting and retaining key people, eg in start-ups with limited cash for high salaries,
• Enhancing remuneration packages tax efficiently,
• Helping with succession planning for major stakeholders, and
• Raising equity funding, particularly in management or employee buy-outs.

Approved vs unapproved employee share schemes

When choosing the best employee share scheme for your business there are several options to consider. Approved schemes offer tax advantages compared to unapproved schemes, but they can be less flexible and come with qualifying rules for both employees and employers.

Share options explained

Share options are often used because there are generally no tax charges until the option is exercised, whereas the direct award of shares can result in an up-front tax charge. However, owning shares up-front allows employees to benefit from having voting rights and entitlement to dividends for example, benefits that they would not have as option holders.

Approved share option schemes

A share option scheme approved by the UK government can be less flexible than an unapproved scheme. However, using an approved scheme can offer significant tax advantages for both employees and employers.

Capital gains tax (CGT) rates on share sales are currently 24%, falling to 18% from 6 April 2026 (14% in 2025-26) where Business Asset Disposal Relief (BADR) applies.

Meanwhile the highest rate of income tax is currently 45% (48% in Scotland) and rising where employee and employer National Insurance contributions (NICs) apply if the shares are considered readily convertible assets (eg shares that can be easily converted into cash or shares in a subsidiary of an unquoted company where the acquisition of the shares does not attract a corporation tax deduction). Approved schemes that can attract capital gains tax on the growth in value of the shares are therefore attractive.

Enterprise Management Incentives (EMI)

Why EMI options are the ‘gold standard’

EMI is an approved share option scheme and EMI options are the ‘gold standard’ for share rewards due to their flexibility and advantageous tax rates. Often, other share rewards are only used when EMI is unavailable, such as where the conditions for EMI cannot be met.

EMI key features

• An individual can be granted up to £250,000 of options,
• Options can be granted at a discount to market value at the date of grant (but income tax will be due at exercise on that discount), and
• Specific BADR rules for EMI options allow the holding period requirement to start from the date of grant.

EMI limits

• A company cannot grant EMI options if it is carrying on certain excluded trades, such as farming, dealing in land or shares, providing legal and accountancy services, banking, insurance and property development,
• From 6 April 2026, there’s a company limit of £6 million on the value of shares over which unexercised options exist, determined at the time of grant (£3 million before 6 April 2026),
• The company must be independent,
• From 6 April 2026, the company must have gross assets of less than £120 million and less than 500 full-time equivalent employees at the time of grant (£30 million and 250 before 6 April 2026),
• In a group, EMI options must be granted over shares in the parent company, and at least one trading subsidiary must carry on a qualifying trade through a UK permanent establishment, and
• An individual cannot hold more than £250,000 of unexercised EMI options at the time of grant.

Company Share Option Plans (CSOP)

CSOP is an approved share option scheme.

When CSOP works better than EMI

Unlike EMI there are no limits on company size or the number of employees and no excluded trades for Company Share Option Plans (CSOPs). This makes CSOPs suitable for larger companies, listed organisations and those whose trade would be excluded for EMI.

CSOP limits and tax treatment

CSOPs are more restrictive than EMI in that:

• Options must be granted at market value,
• Each employee can only be granted up to £60,000 of options, and
• The gain is exempt from income tax only if the options are held for at least three years.

CSOP use in multinational groups

CSOPs are popular with larger companies and are often used as sub-plans for UK subsidiaries of overseas groups of companies. In group structures, CSOP options are usually granted over shares in the parent company, as unlisted subsidiaries generally cannot use their own shares unless they are listed.

Unapproved share options

An unapproved share option is a scheme without tax advantages because the business offering it either does not qualify for an approved share option scheme or has chosen not to offer an approved share option scheme to its employees at the time.

Like approved options, there is no initial tax cost up-front. However, any gain on exercise will be taxed as employment income.

These options do offer commercial flexibility are can be used to supplement approved schemes.

Approved all-employee schemes: SIP and SAYE

There are two all-employee approved share ownership plans; the share incentive plan (SIP) and the save as you earn (SAYE) scheme.

How share incentive plans (SIP) work

SIPs broadly allow employees to acquire shares from pre-tax income, with employers able to top up these awards. The shares are then held in trust for a minimum period and, when taken out after the required holding period, can potentially be sold or retained without an income tax charge arising. If shares remain in the plan until they are sold there should be no CGT to pay.

How save as you earn (SAYE) work

The SAYE scheme is a savings plan where employees can purchase shares at a discount of up to 20% on funds paid into a savings plan over a three or five-year period without an income tax charge arising from the acquisition.

The all-employee nature of these plans can make them difficult to implement but, in our experience, they have a good track record of incentivising and retaining employees in the right circumstances.

Direct share acquisition

The future increase in value will, in most cases, be treated as a capital gain, but if market value is not paid on acquisition (being a tax valuation including minority discounts), the discount will be treated as a taxable amount subject to income tax. If the shares are valuable, the income tax charge can be material and this is why other type of employee share incentives are often considered.

If shares are not currently considered readily convertible at acquisition, the discount should not be subject to PAYE/NICs but will instead be taxable via self-assessment, unless the company is under the control of another company, in which case PAYE/NICs might still apply.

Direct share acquisitions are often used where there is a commercial requirement for the employees to have voting rights or where there is a requirement for them to share in future dividend payments.

Care needs to be taken where the shares acquired are restricted to ensure that additional income tax charges will not arise later when the restrictions fall away (at a time when the shares might be more valuable) .

Growth shares

This requires the creation of a new class of shares, where the shareholders are only entitled to dividends or sale proceeds once a particular financial hurdle has been achieved.

If this hurdle is considered a stretching target, it allows a significant discount to be applied to the initial market value of the shares, reducing the market value at award to a typically low value and therefore making the growth shares more affordable to the acquiring employee. Any further increase in value should then be taxed as a capital gain.

The process of setting the appropriate hurdle and valuing the new class of shares can be complex (as can the legal drafting of share rights by the lawyers). Since this hurdle will be an inherent characteristic of the share class, it must be included in the company’s articles. Care will need to be taken to reduce potentially sensitive material as the articles would be available publicly.

Once created, the new class of shares can be used for share option awards, such as an under an EMI scheme (eg where the company’s full rights shares would not meet the financial limits for EMI).

Growth shares are typically used in companies where the acquisition price of full rights shares is quite high, making better use of limits under approved schemes or reducing the acquisition cost for employees who acquire shares.

Jointly owned shares

Jointly owned shares provide an alternative route to growth shares, particularly for listed companies or those where creating a new class of shares is not feasible. Under this structure, an employee and an Employee Benefit Trust (EBT) jointly own a single share. The trust normally retains the value of the share at the time it is acquired, together with any agreed return on that amount and the costs of running the trust (the ‘carry costs’), while the employee benefits from most of the future growth in value.

Jointly owned share arrangements tend to be very rare as they are complex and require specialist legal and valuation input, as well as the use of an EBT.

But, when set up correctly, these arrangements can enable the employee to acquire an interest for a low cost and have their share of future growth subject to capital gains tax on exit without creating a new class of share.

Business Asset Disposal Relief (BADR)

Where an employee owns 5% of the share capital (by voting rights, number of shares, dividend rights and disposal proceeds), providing they own the shares for at least two years prior to sale, they should qualify for BADR and a lower 18% rate of CGT from 6 April 2026 (14% for the 2025-26 tax year).

While for unapproved options and CSOPs this would require the employee to exercise the options two years before any sale, there are special rules for EMI options that treat the holding period as counting from the date of grant, so they can exercise immediately before an exit event and still be entitled to the lower rate of CGT.

For more on this relief see Business Asset Disposal Relief (BADR).

Employee Ownership Trusts (EOTs)

An Employee Ownership Trust (EOT) goes further than most of the planning above by giving employees (as a whole) a controlling interest in the company though a trust-based arrangement.

How EOTs support succession planning

An EOT remains an efficient succession planning mechanism; however, from 26 November 2026, the previous 100% capital gains tax (CGT) relief available on a qualifying disposal to an EOT has been reduced. Instead of full relief, only 50% of the gain arising on the disposal is exempt from CGT, with the remaining 50% taxable (and based on the current CGT rate of 24%, gives an effective CGT rate of EOT disposal of 12%).

Employees can still acquire an indirect ownership interest without using their own funds, and, once the EOT is in place, the company can pay tax-free bonuses to employees of up to £3,600 a year.

For more details see Employee Ownership Trusts.

Share valuation requirements

Determining the market value of a share in a listed company is fairly straightforward, but it’s complex for private companies.

Without external transactions to reference, the valuation must be based on financial records. This involves different valuations methods and may include discounts for minority shareholdings, as small shareholders’ shares can be worth less per share than those of a controlling interest.

Valuation is a key part of the share reward process and should be prioritised.

How we can help

Our experts have extensive experience in helping companies grant tax-efficient share incentives and share options to employees. We can guide you through every aspect of these arrangements, including choosing the right scheme, setting appropriate performance targets, carrying out valuations and meeting your tax requirements.

If you’d like to understand more about how a share scheme could help your business and employees, please get in touch with your usual Saffery contact or Sean Watts.