Share Incentives for UK Employees of Private Companies

Companies generally consider it a good idea for employees to be stakeholders in the business in which they work and believe share-based incentives offer the ability to reward, motivate and retain key staff.

There are various ways in which UK employees of private companies can receive share incentives (i.e., an equity stake in their employer) through the grant of options or as a direct award of shares. Commercial, cultural and tax considerations often dictate which route is chosen.

Share options: Tax-advantaged options

Enterprise management incentive

Enterprise Management Incentive (EMI) options are ideal for growing independent companies with a UK presence wishing to incentivise employees with equity. EMI options are tax-efficient and easy to implement, and companies have flexibility regarding the terms by which the options will become exercisable, by reference to time, performance or an exit, with the ability to include good/bad leaver provisions. For these reasons, most venture-backed startup companies structure their equity incentives for UK employees as EMI options where possible.

To be eligible, on the date of grant the company, together with its group of related companies, must have gross assets below 120 million pounds and fewer than 500 full-time employees. These limits increased from 30 million pounds and 250 full-time employees for grants made on or after 6 April 2026.

The maximum entitlement of an individual EMI option holder at the date of grant of the EMI option is 250,000 pounds, based on the value of the shares. There is also a limit of 6 million pounds on the total value of unexercised EMI options per company, increased from 3 million pounds from 6 April 2026. There should be no tax liability on the exercise of an EMI option if the exercise price is set at ‘actual market value’, which can be agreed in advance with His Majesty’s Revenue and Customs (HMRC) for certainty.

EMI legislation sets out two requirements regarding the exercise of EMI options. It requires that EMI options are capable of being exercised within 15 years of the grant date, increased from 10 years from 6 April 2026, and only within a period of 12 months following the option holder’s death. HMRC must be notified before 6 July following the end of the tax year in which the EMI options are granted. From 6 April 2027, the EMI notification requirement will be removed altogether, further simplifying EMI compliance.

On a subsequent sale of the shares, Capital Gains Tax will be charged on the difference between the disposal proceeds less the exercise price of the EMI option. The employee can use their annual allowance and, if an EMI option holder satisfies the two-year holding requirement between grant of option and disposal of shares, Business Asset Disposal Relief (BADR) can reduce the rate of Capital Gains Tax payable to 18% for the UK tax year 2026/2027 (increased from 14% for the UK tax year 2025/2026), for gains up to a current lifetime limit of one million pounds.

The relaxing of the EMI criteria from 6 April 2026 allows larger ‘scale-up’ companies who had moved to granting less flexible Company Share Option Plan (CSOP) options to benefit once again from granting EMI options. This change also enables more UK employees to benefit from lower capital gains tax rates as the number of qualifying companies increases and allows qualifying companies to grant more EMI options.

Company share option plan

For companies that have outgrown EMI, CSOP is a discretionary tax-advantaged plan under which options can be granted to eligible employees.

The maximum entitlement of an individual CSOP option holder at the date of grant is 60,000 pounds, based on the value of the shares on the date of grant. The exercise price of a CSOP option must not be less than the market value of a share, and for unlisted companies, HMRC’s guidance is that this value should be agreed in advance with HMRC.

There should be no tax liability on exercise of a CSOP option if the date of exercise is at least three years from the date of grant. CSOP tax advantages may also be available for earlier exercises where the option holder ceases employment due to disability, injury, redundancy or retirement and the option is exercised within six months of leaving, or on a sale of the company in certain circumstances.

On a subsequent sale of the shares, Capital Gains Tax will be charged on the difference between the disposal proceeds less the exercise price of the CSOP option. The employee can use their annual allowance. BADR is not available in connection with CSOP options.

Share options: Non-tax-advantaged options

Options granted outside of a tax-advantaged arrangement are subject to Income Tax, and potentially employee and employer National Insurance contributions, on the ‘spread’ at exercise and Capital Gains Tax on any further profit at sale.

Although these arrangements do not offer tax efficiencies, they are flexible and simple to understand and operate

Awards of shares

Awards of shares to employees can be subject to time-based vesting, performance conditions and good/bad leaver provisions – just like options.

There will be an Income Tax charge on acquisition if the employee pays less than market value.

If the shares are subject to restrictions, such as vesting, and the employee pays or is taxed on the full ‘unrestricted market value’ of the shares, the employee and employer would usually enter into a section 431 election within 14 days of acquisition. This avoids adverse post-acquisition Income Tax charges as the restrictions lift and/or when the shares are sold. Any profit on sale should then be subject to Capital Gains Tax.

Where the market value of ordinary shares is high, companies may create a new class of ‘hurdle’ or ‘growth’ shares that entitle employee shareholders to a percentage of the proceeds on an exit of the company above a predetermined hurdle value (greater than its current value). Given the hurdle, these shares should have a low market value and can therefore be acquired by the individual without much cost. Any profit on sale at exit should then be subject to Capital Gains Tax.

Learn about equity incentives for US companies in Establishing the Ownership Culture: Stock Versus Options