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Starting an employee share option scheme

October 31, 2022
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Depending on the employee share scheme set-up, they can be tax-advantaged or non-tax-advantaged. Tax-advantaged plans present tax benefits on the shares/options issued. However, the terms and criteria for tax-advantaged qualification are defined explicitly by HMRC—so if you end up drafting a share scheme outside of HMRC's rules, it will be non-tax-advantaged. An employee share option scheme can help unite the team and create a company full of enthusiastic and hardworking individuals when done correctly. Your employees will share a common goal of making the company as successful and profitable as possible due to their part ownership.

The best team is one that’s working towards a common goal. By sharing a united focus, it’s easier for employees to celebrate joint successes and move the company forwards as a whole. Unfortunately, the success of a business isn’t always enough to motivate team members. This is where employee share option schemes come into play.

An employee share option scheme is an equity plan that allows business owners to share their company’s ownership with selected members of their team. They are becoming increasingly popular options for small businesses looking to share their successes in a flexible, tax-efficient manner. However, not all small-to-medium-sized enterprises are eligible for the scheme. And even for those that are, it can be difficult to know where to start.

To help you understand this subject in greater detail, this article covers everything you need to know about the share scheme. We compare it against similar schemes, shed some light on the most popular scheme of its kind and explain how it can be set up in four simple steps.

Read on if you’re interested in unlocking your company’s potential.


An employee option scheme is an equity compensation plan where business owners offer shares of their company to employees of their choice. The scheme gives selected members of staff the right to purchase a certain number of shares at a fixed price.

In contrast to schemes that offer real shares, options schemes only allow participants to buy shares at a later date that normally falls at the end of a specified time period. These options then turn into real shares once they are exercised by the business owner and employee.

The conditions of the scheme usually prevent participants from transferring or selling their shares. What's more, in most cases, the offer can be revoked if it's not accepted within a pre-agreed time frame or if employees end up breaching their employment contract.

These schemes are typically introduced to reward specific workers. They can be a great option for employers who are looking to award and motivate members of their team without forking out on expensive salaries or bonuses. Despite this, they aren't suitable for every SME, so business owners need to do their research before they decide to move forwards with this option.


Employee option share schemes belong to a broader family of share schemes. Due to their related names and characteristics, it’s common for them to get confused with plans of a similar nature. Below we break down some other share schemes that are available to small businesses.

Share-purchase schemes

Share-purchase schemes offer employees real shares in the business instantaneously, rather than an option to buy them at a later date. They can feature a wide variety of shares, and they usually allow recipients to pay them off in instalments.

Share-award schemes

Similarly to share-purchase schemes, share-award schemes give members of staff actual shares. What’smore, this plan allows participants to buy the real shares for less than their market value or for no cost at all. The awarded shares are treated as an employment income are therefore subject to tax and National Insurance contributions.


There are a number of different ways to provide share options to your workforce. However, for UK businesses looking to allocate options, the enterprise management incentive, or EMI for short, remains the most popular solution by far.

The EMI scheme is a government-backed share option scheme that allows companies to reward select employees with equity participation in the business. The plan is tax-advantaged, which means that the share options offered to employees qualify for statutory tax reliefs. This makes the EMI scheme much more tax-efficient than similar models—both for the company and for the participating employees.

The EMI scheme is also favourable because of its highly flexible nature. When involved in the initiative, business owners are able to adjust the plan to suit their needs. For instance, they can choose the extent of the employee's ownership, how entitled they are to the business’s underlying value and whether or not they are eligible for dividends or voting rights.

What different forms does it take?

For business owners interested in the EMI scheme, there are a number of different options to choose from. Below we list three of the most popular forms.

  • Time-based plans - Time-based EMI schemes allow employees to build up a shareholding over time.
  • Performance-driven plans - This type of EMI uses share options to intensive staff to meet performance goals.
  • Exit-driven plans - Exit-driven EMI’s pass shares down to selected employees when shareholders exercise the value themselves.


Now you’re clued up about the EMI and the various forms that it takes, let’s take a look at why an increasing amount of business owners are launching employment option schemes.

Helps you to attract high-quality talent

Sourcing valuable talent for your team is no easy feat, especially for growing businesses where funds are often in short supply. Fortunately, for business owners struggling to offer competitive salaries, schemes like the EMI allow them to attract highly skilled personnel by offering them equity of the company. This improves the quality of candidates applying for your openings, helping you to compete with larger companies with bigger cash reserves.

Keeps staff motivated

Employee share options schemes like EMI are also an indispensable way to keep staff motivated in the workplace. When employees are awarded shareholder rights, they are more likely to feel responsible about where the company is heading. In many cases, this improves their drive and motivates them to carry out their best work possible.

Additionally, share option schemes have the additional bonus of making individual workers feel more valued. Aside from benefiting their wellbeing, this can incentivise share participants to put more effort back into the company.

Offers tax advantages

Aside from their clear benefits for personnel, business owners are also attracted to plans like EMI's because of their tax-efficient nature. Since most plans don't charge income tax on employee options, they're an extremely cost-effective way to incentivise staff. To be specific, when selected workers finally sell their activated shares, they're only expected to contribute 10% of tax on their profit. This is opposed to the 45% of income tax they would normally be spending.

It’s highly flexible

Finally, employment option schemes like the EMI scheme are also growing in popularity because of their flexible applications. Every SME operates slightly differently. Therefore, every business owner is seeking something slightly different from share initiatives. The EMI takes this into account and lets companies adjust their plan to suit their individual business goals. By avoiding a one-size-fits-all approach, the scheme is able to be adopted by an incredibly wide selection of businesses.


Fortunately for business owners, the price of setting up an employment option scheme has significantly dropped in recent years. Schemes like the EMI used to set companies back anywhere from £2500 to £5000, depending on the size and characteristics of the plan. Now, business owners can expect to pay a flat fee of £1500 to set up an employee option share scheme.


Due to recent technological developments, setting up an employee option scheme doesn’t need to be a lengthy process. There are, however, a number of steps business owners need to take before their scheme can go live. We break down the most important steps below.

1. Work out if you’re eligible

Before you start an employee share option scheme, you need to make sure your SME is eligible. Eligibility criteria vary across schemes, but to qualify EMI scheme, your business needs to have fewer than 250 full-time employees, not be controlled by another company, own less than £30m of assets. Employees also need to pass a certain set of criteria too, so it's important to research - beforehand.

2. Design your scheme

Due to the adaptable nature of the EMI scheme, the plan is able to be altered to suit you and your business’s needs. When designing your initiative, the main things you should consider is which employees will be asked, how big the shares be and when your recipients will be able to exercise their shares.

3. Gain corporate authorisation

Once you've designed your scheme, you need to seek corporate authorisation. Depending on the nature of your company, this can be done in a number of different ways. For example, you can gain corporate authorisation through your company's shareholders or Board of Directors or by revising your business's Articles of Association.

4. Register with HMRC

Before your employment option share scheme is officially recognised, it needs to be registered with HMRC. Therefore, before you launch your scheme, you need to visit the GOV.UK website and submit an EMI notification. You need to do this within 92 days of the grant date, or your tax benefits may be jeopardised.

For details on how to register your scheme with HMRC, you can visit this page.


If you’re serious about attracting and retaining high calibre staff and celebrating your company’s successes together, you’re likely to benefit from an employee share option scheme. The EMI is currently the most popular solution for UK SMEs looking to divvy out options. However, it's not the only scheme that's available. To make sure you've picked the best plan possible for you and your workforce, it's important that you consider all possible options before moving you allocate your shares.


Do you pay Capital Gains Tax on employee shares?

Employees do not have to pay any Income Tax or National Insurance on shares if they keep them for five years. They will also be exempt from paying any Capital Gains Tax when they come to sell the shares (assuming they have been kept in the Share Incentive Plan).

Are share options worth it in the UK?

In the UK, share options provide a decent midpoint between cash bonuses and share awards. They also offer a great way to give incentives without diluting the equity interest of your business. It is worth noting that the share option arrangements will require legal drafting, and the value of the options to be acquired will have to be determined via a professional business valuation method.

Why should business owners launch employee share option schemes? There is a lot of research that backs up the business case for an employee share scheme option. Some of the main reasons for launching this benefit to your employees include:

  • Attracts and retains the best talent
  • Increases productivity and performance
  • Improves employee engagement and happiness
  • Tax advantages

What is the difference between shares and options?

You can either give your employees the actual shares now or choose to issue options that can be exercised in the future. Shares will provide your employees with immediate real ownership, dividend benefits and the right to receive voting rights. Options will permit your employees to buy shares at a later date at a pre-agreed price.

Can a company buy back shares from their employees?

Yes, companies can buy back shares from employees. One of the main situations this arises is when an employee is required to give up their shares when they leave (like if they have been dismissed or have resigned). Companies in this circumstance often buy the leaver's shares back and then hold them in treasury – ready to be given to a new employee.

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