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Legal 24 August 2026 By Matthew Strain

Phantom shares and unapproved options, and when they beat EMI

Not every business qualifies for EMI, and not everybody you want to reward is an employee. The two structures people reach for next are unapproved options and phantom shares. Both are worse on tax than EMI and both do things EMI cannot, which is the whole reason they exist.

Key takeaways
  1. Unapproved options are ordinary share options with no statutory scheme behind them - no eligibility rules, no limits, and no tax relief. Income tax and National Insurance arise on exercise, on the difference between what is paid and what the shares are then worth.
  2. Phantom shares are not shares at all. They are a contractual promise of a cash bonus calculated by reference to share value, paid through payroll and taxed as earnings.
  3. Phantom shares are the answer when the real objection is dilution. Nobody joins the share register, nobody gains votes, and the cap table is untouched.
  4. Unapproved options are the answer when the recipient cannot hold EMI - contractors, non-executive directors, advisers, or anyone in a company failing the trade or size tests.
  5. Neither is a workaround for a company which could have had EMI. Where EMI is available it is materially better, and the gap on a real exit is large.

Unapproved options, and why the name is unhelpful

"Unapproved" sounds like a warning and is simply a description. An unapproved option is an ordinary contractual right to buy shares at a fixed price, sitting outside any statutory tax-advantaged scheme. Nothing about it is irregular or frowned upon.

What it lacks is relief. It also lacks restrictions, and that is the point. There are no eligibility conditions, no working time requirement, no gross assets test, no company size limit, and no cap on how much any individual can hold. You can grant them to a contractor, a non-executive director, an adviser, a consultant, or someone in an excluded trade - every category EMI shuts out.

They are the standard answer for two situations: a company which cannot qualify for EMI, and a person who cannot, inside a company which otherwise can. Plenty of businesses run an EMI scheme for their employees and a small unapproved arrangement alongside it for the two people it cannot reach.

Phantom shares, which are not shares

A phantom share scheme involves no shares, no options and no share register. It is a contract promising a cash payment, calculated by reference to what a share would have been worth.

Someone is allocated a number of notional units. Those units track the value of a real share. On a trigger event - usually a sale, sometimes a fixed date or a performance milestone - the holder is paid cash equal to the value of the units, or to the growth in that value since award. The company writes a cheque; the employee never owns anything.

That is a genuine advantage in the right circumstances. There is no dilution, nobody acquires voting rights, no minority shareholder appears to complicate a future sale, and the whole arrangement is governed by contract law rather than by the company’s constitution. For a founder whose real objection to a share scheme is "I do not want anybody else on the register", phantom shares answer the actual question.

The cost is cash. On a sale, phantom payouts come out of the proceeds as a liability of the company, and the company must actually be able to pay them.

Read more Employee share schemes explained: EMI, CSOP, SIP and SAYE

What each one costs

This is where both structures lose to EMI, and it is worth being blunt about the size of it.

With an unapproved option, no charge arises on grant. On exercise, the difference between what the employee pays and what the shares are then worth is taxed as employment income at their marginal rate, with employee National Insurance on top, and the company pays employer NICs as well. Any growth after exercise is a capital gain. The shares acquired are restricted securities, so a section 431 election is usually made within 14 days.

With phantom shares, nothing happens on award because the holder receives nothing of value. The payout is a cash bonus, taxed as earnings through PAYE with National Insurance, exactly like any other bonus. There is no capital gains treatment available at all, because there is no asset.

Set against EMI, where a properly structured scheme delivers capital gains treatment and, after two years from grant, Business Asset Disposal Relief at 18%, the difference on a meaningful exit runs to tens of thousands of pounds per participant. The company also gets a corporation tax deduction under each of the three, so that part does not separate them.

Choosing between them

The question is not which is better in the abstract. It is which objection you are actually solving.

  1. The company cannot qualify for EMI - excluded trade, too large, not independent. Unapproved options, or growth shares if the tax profile matters more than simplicity.
  2. The person cannot qualify - a contractor, a non-executive, an adviser. Unapproved options.
  3. You do not want anyone else on the register. Phantom shares. This is the only one of the three which genuinely answers that.
  4. You want to reward performance without tying it to an exit. Phantom shares with a date or milestone trigger, which behaves like a long-term bonus.

And if the honest answer is that EMI was available and nobody got round to it, the right advice is to go back and do that instead. The limits rose substantially on 6 April 2026, and a good number of companies which were told they had outgrown EMI now qualify comfortably.

Frequently asked questions

What are phantom shares?

A contractual promise of a cash payment calculated by reference to the value of a company’s shares. The holder receives no shares, no options and no voting rights, and never appears on the share register. On a trigger event, usually a sale, they are paid cash equal to the value or the growth in value of their notional units.

How are phantom shares taxed in the UK?

There is no charge when the units are awarded, because nothing of value has been received. The payout is treated as employment earnings and taxed through PAYE with National Insurance, in the same way as a cash bonus. Capital gains treatment is not available, because the holder never owns an asset.

What is the difference between EMI and unapproved options?

EMI is a statutory tax-advantaged scheme with eligibility conditions for both the company and the individual, delivering capital gains treatment and no income tax on exercise where the exercise price is at market value. Unapproved options have no eligibility rules and no limits, but the gain on exercise is taxed as employment income with National Insurance.

Can you give share options to a contractor?

Not under EMI, which requires the holder to be an employee or a director meeting a working time commitment. Unapproved options carry no such restriction and can be granted to contractors, consultants, advisers and non-executive directors, which is one of the main reasons companies use them alongside an EMI scheme.

Work out which one you actually need

Most of these conversations start with someone asking for a share scheme and end somewhere else, because the real objection turns out to be dilution, or eligibility, or cash. Silva will tell you which of the three fits before drafting anything.

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