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Incentivising Staff With Tax Efficient Share Option Schemes

18th June 2025

With many businesses facing rising employment costs, particularly National Insurance contributions, many are under increasing pressure to find smarter, more sustainable ways to reward and retain key employees.

Traditional salary increases or bonuses often come with significant tax implications for both the business and the individual, reducing the overall benefit.

As a result, more companies are turning to tax-efficient employee share option schemes. These schemes offer a powerful alternative, often with substantial tax savings.

In this blog, we explore the main tax efficient share option schemes available to UK businesses, including HMRC-approved options like EMI, CSOP, and SIP, as well as bespoke solutions like growth shares and LTIPs.

 

What is an employee share option scheme?

An employee share option scheme gives staff the opportunity to acquire shares in the business, usually at a set price and after meeting certain conditions, such as staying with the company for a specific period or reaching performance targets.

These schemes offer a practical way to give employees a real interest in the company’s success. They can help build a stronger sense of ownership, align individual efforts with business goals, and encourage long-term commitment.

As an employer, they offer a flexible and tax-efficient alternative to salary increases or bonuses, especially valuable at a time when rising national insurance costs are putting additional pressure on businesses.

 

How share option schemes benefit your business

Introducing a share option scheme can bring a range of strategic benefits to your business. Beyond being a tax-efficient reward mechanism, these schemes can strengthen your overall employee offering by helping you stand out in a competitive hiring market.

For ambitious professionals, the prospect of owning part of the business can be far more compelling than more traditional short-term incentives.

They can also help create long-term stability within your team. Since many schemes are tied to the length of service or performance milestones, they naturally encourage commitment and forward-thinking, both of which are essential for sustained growth.

What’s more, offering equity can shift employee mindset from short-term tasks to long-term outcomes, fostering a more commercially aware and invested workforce.

 

Choosing a tax efficient share option scheme?

With a range of share option schemes available in the UK, each offering different benefits and eligibility criteria. Here is a selection of popular tax-advantaged share schemes that could benefit your business.

Table comparison of share option schemes

 

Enterprise Management Incentives (EMI)

EMI schemes are particularly well-suited to smaller, high-growth companies that have assets of less than £30 million and fewer than 250 full-time employees. They allow employers to grant qualifying employees up to £250,000 in share options provided they work at least 25 hours per week.

A key requirement when setting up an EMI scheme is obtaining a fair market valuation of the shares. HMRC approval is often sought in advance to avoid future disputes over value and tax treatment.

No Income Tax or National Insurance is due when the options are granted, and if the shares are bought at market value, no tax is due when they are exercised either.

When the employee eventually sells the shares, they may be liable for Capital Gains Tax on the profit, typically at rates of up to 24%, unless Business Asset Disposal Relief applies. If eligible, the first £1 million may be taxed at a lower rate of 14% (or 18% for disposals on or after 6 April 2026).

If you implement an EMI scheme, you’ll need to file an annual return with HMRC using the Employment Related Securities (ERS) online service. This ensures continued tax-advantaged status and helps you stay compliant.

This structure makes EMI schemes one of the most flexible tools for rewarding key employees in a tax-efficient way.

 

Company Share Option Plan (CSOP)

Company Share Option Plans (CSOPs) are typically used by larger or more established companies. Under this scheme, employees can be granted up to £60,000 in share options.

CSOPs are less restrictive than EMI schemes, though the company must still carry on a qualifying trade and meet certain independence criteria. However, there are fewer restrictions regarding the size and working hours of employees.

As with EMI schemes, there is no Income Tax or National Insurance to pay when the options are granted or exercised, provided the scheme conditions are met.

To ensure the award remains tax-free, the options must be exercised no earlier than three years, and no later than ten years, from the date of grant.

Tax is only due when the shares are eventually sold and even then, it’s treated as a capital gain, which can mean lower tax rates compared to income.

 

Share Incentive Plan (SIP)

A Share Incentive Plan (SIP) is an HMRC-recognised, tax-efficient “all‑employee” scheme that enables staff to acquire equity through four flexible routes: free, partnership, matching, and dividend shares.

As of 2025, employers can award up to £3,600 in free shares, while employees can buy up to £1,800 (or 10% of salary) in partnership shares from their pre‑tax pay.

Employers can further enhance participation by offering up to two matching shares for every partnership share purchased.

Once shares are held in the SIP trust for five years (three years for dividend shares), employees can withdraw them with no Income Tax, National Insurance, or Capital Gains Tax.

 

Growth shares

Growth shares provide a targeted and flexible way to reward key staff in private companies. These shares are issued with a specific threshold, meaning employees only benefit from increases in share value above a set baseline.

Accurate share valuation is also crucial when issuing growth shares. Getting a professional valuation helps ensure any future gains qualify for Capital Gains Tax rather than being treated as income.

This structure means early team members share in the company’s upside after reaching key valuation levels but aren’t entitled to the initial value.

Structuring growth shares in this way ensures that both founders and key staff are aligned towards unlocking new value, with gains potentially subject to more favourable Capital Gains Tax treatment, provided the shares are structured and valued correctly to avoid employment-related income tax charges.

 

Expert advice from Edwards Chartered Accountants

Located in Aldridge, our team of taxation experts has vast experience advising businesses through every stage of setting up and managing employee share option schemes.

From assessing eligibility and preparing valuations to ensuring HMRC compliance, we can guide you through the process and help tailor a solution that works for your business.

Contact Edwards Accountants today to find out more.