Employee share schemes, explained

Options, not shares - the distinction that matters

Start here, because it's where most conversations go wrong. When a founder says "I'll give you some equity", they usually picture handing over shares. That's almost never what you want to do.

Give someone shares today and you've given them something with value today - which HMRC will notice, and tax accordingly. You've also given them a shareholder: someone with rights, a seat at the table, and a claim on the business if things go sideways between you.

An option is different. It's the right to buy shares later, at a price fixed now. If the company grows, the gain is theirs. If they leave after eight months, they walk away with nothing and you keep your cap table intact. Almost every scheme worth using is built on options for exactly that reason - the upside is shared, the risk isn't.

The schemes, and what each is actually for

Five routes cover nearly everything:

1. EMI (Enterprise Management Incentives) - HMRC's most generous scheme, designed deliberately for smaller, growing companies. Options up to £250,000 per employee over three years, flexible on who gets what, and the tax treatment is the best available. The constraint is eligibility: your trade, your size and your gross assets all have to qualify, and several sectors are excluded outright.
2. CSOP (Company Share Option Plan) - broadly similar tax treatment, no trade restrictions, and available to companies far too big for EMI. The individual limit is £60,000, though, against EMI's £250,000. Most businesses don't choose CSOP so much as arrive at it, having found they can't have EMI.
3. SIP (Share Incentive Plan) - real shares rather than options, usually bought through payroll, held in a trust for a qualifying period. Built for all-employee participation, and more common in larger businesses than early-stage ones.
4. SAYE (Save As You Earn) - employees save monthly and buy shares at a discount at the end. Tidy and tax-efficient, but it has to be offered to everyone eligible, which makes it useless if your aim is rewarding four key people.
5. Unapproved options - options outside any scheme. No eligibility rules, total flexibility, and materially worse tax: income tax and National Insurance on the gain rather than capital gains rates. Sometimes it's the only option available. It's rarely the one you'd pick first.

For a growing SME wanting to reward a handful of people who matter, the honest shortlist is EMI, then CSOP if EMI is off the table, then unapproved if neither works.

Why the tax treatment is the whole argument

Strip away the acronyms and this is what you're actually buying.

Reward someone with equity informally - a promise, a side letter, shares handed over because it felt right - and HMRC will generally treat the value as employment income. Income tax. National Insurance. Taxed like salary, because in substance that's what it is.

Run the same reward through a qualifying scheme and, provided the conditions hold, the gain is taxed at capital gains rates when the shares are eventually sold. Same economic outcome for the business. Substantially more of it ends up with the person you were trying to reward.

That gap is the entire commercial case for doing this properly. It's also why the informal promise is such an expensive kindness - it costs the recipient real money, and they usually don't discover that until the exit, which is a bad day to find out.

The tax is the headline. The leaver clause is the substance

Here's the part that gets least attention and causes most grief.

Every scheme needs to answer a question nobody enjoys asking at the point of granting: what happens when this person leaves? Not if - when. People leave. They resign, they're let go, they fall out with you, occasionally they do something that means they're gone by lunchtime.

Good scheme rules decide all of that in advance. Vesting decides how much they've earned by the time they go. Good leaver and bad leaver provisions decide whether they keep it. Get those right and a departure is administration. Get them wrong - or leave them vague - and a departure is a negotiation with someone who has every reason to be difficult and a claim on your company while they are.

The tax treatment is what gets founders interested in a scheme. The leaver provisions are what make it worth having.

If you were told you're too big for EMI, check again

This one is worth a paragraph of its own, because the ground moved recently and plenty of people haven't noticed.

From 6 April 2026 the EMI eligibility limits went up substantially. Gross assets went from £30m to £120m. The employee cap went from under 250 to under 500. The total value of options a company can have under EMI went from £3m to £6m, and the exercise period stretched from ten years to fifteen.

Which means a business told two years ago it had outgrown EMI may now sit comfortably inside the limits. If that was you, and you settled for CSOP or unapproved options on the strength of the old thresholds, it's worth another look.

One carve-out to know about: companies registered in Northern Ireland trading in goods or electricity - "Specified Companies" in the legislation - keep the old £30m and £3m limits. Narrow, but it catches people.

Working out what fits

The scheme has to match the company, not the other way round. What it turns on:

1. Whether you qualify for EMI at all - trade, size and gross assets. If you do, that's almost always the starting point, because nothing else is as generous. Note the excluded trades, which include banking, farming, property development, ship building and the provision of legal services.
2. If you don't, whether CSOP works instead - no trade restrictions and no size ceiling in the way EMI has one, at the cost of a £60,000 individual limit against EMI's £250,000.
3. Whether this is for a few key people or for everybody. EMI and CSOP suit selective grants. SIP and SAYE are built for all-employee schemes and behave completely differently.
4. How much of the company you're genuinely willing to part with, and over what timescale. This is a commercial decision that people tend to make far too casually, then live with for a decade.

Most founders arrive at this conversation about two years later than they should have, usually because someone has finally asked them to write down what they promised. Earlier is cheaper. It nearly always is.

Frequently asked questions