Employee Share Options Explained: EMI vs Unapproved Schemes

Equity has become the currency of modern startups. In an environment where cash is constrained but ambition is not, founders increasingly rely on employee share schemes to attract, motivate and retain high-calibre talent. Yet the moment a company moves beyond the idea stage, a more complex question emerges: how should that equity be structured?

In the UK, the choice typically narrows to two paths, Enterprise Management Incentives (EMI) or unapproved share option schemes. On paper, the distinction is straightforward. In practice, it carries profound implications for tax, compliance and long-term value creation. A poorly structured scheme can leave employees facing unexpected tax bills, while a well-designed one can significantly enhance net returns and alignment.

This guide unpacks both approaches in detail, cutting through technical jargon to help founders make informed, commercially sound decisions about their equity strategy.

What is an employee share scheme?

An employee share scheme is a formal arrangement that allows a company to grant employees an ownership stake through options or shares, typically as part of compensation or incentive planning. Start‑ups use share schemes to attract and retain talent, to align everyone’s incentives and to preserve cash. At the simplest level, you can give staff free shares outright, grant them share options that vest over time or let them buy shares at a discount.

HMRC distinguishes between tax‑advantaged schemes (such as Share Incentive Plans, Save As You Earn, Company Share Option Plans and the EMI share scheme) and non‑approved arrangements. The tax‑advantaged schemes must meet strict rules but offer employees lower Income Tax and National Insurance bills, while unapproved share schemes give companies more flexibility but deliver no tax break for employees.

In practice, founders usually pick between the EMI scheme and a simple unapproved share scheme. The EMI is designed for trading companies with modest assets and headcounts. Unapproved plans, sometimes called non‑tax‑advantaged share options, can be used by any company and do not require HMRC approval, but the gains are taxed as earnings at exercise. This guide focuses on these two options for the UK market and shows how they work, who qualifies and how to choose.

How share schemes work in practice

At their core, share schemes enable employees to buy or receive company equity at a predetermined price. The company’s board approves an option pool and grants options under an agreement that sets the exercise price, vesting schedule and any performance conditions.

Once vested, the employee can exercise the option to acquire shares. If the company’s value grows, the difference between the exercise price and market value becomes the employee’s gain. Tax treatment depends on whether the option is under an HMRC‑approved employee share scheme (like EMI) or an unapproved arrangement. Getting these details right, setting a fair market value, drafting option agreements, and maintaining the cap table are essential. Platforms like the Undo Capital share scheme platform help founders manage grants, valuations and compliance without legal headaches.

What is an EMI share option scheme?

The Enterprise Management Incentive (EMI) share scheme is the UK’s flagship tax‑advantaged option plan for early‑stage companies. It allows a business to grant employees options over shares up to a maximum value while deferring tax until sale. To be eligible, the company must be an independent trading company; its gross assets and headcount must fall under HMRC limits.

Until 5 April 2026, the limits were £30 million in gross assets and fewer than 250 full‑time employees. From 6 April 2026, those caps increase dramatically to £120 million and 500 employees, and the overall company option limit doubles from £3 million to £6 million. The exercise period for EMI options is also extended from ten years to fifteen years and can be applied retrospectively to existing options. These changes make the EMI accessible to scale‑ups as well as start‑ups.

Under the EMI employee share scheme, eligible employees can receive options worth up to £250,000 over a three‑year period. The employee must commit at least 25 hours per week, or, if less, 75% of their total working time, to the company or its qualifying subsidiaries. This working time includes any time they would have spent working but for sickness, maternity, parental leave or other statutory exceptions. A disqualifying event occurs if the employee falls below the 25‑hour/75% threshold, which can change the tax treatment of existing options.

Key features of an EMI share option scheme

• Eligibility criteria: Companies must carry on a qualifying trade and may not engage primarily in excluded activities such as banking, farming, property development, legal services or ship building. The company must remain independent and cannot be controlled by another company. Employees cannot hold or control more than 30% of the company’s share capital (a “material interest”).
• Working time commitment: Employees must work at least 25 hours a week or 75% of their working time for the company. Remunerative work for other employers or self‑employment counts towards the total working time, so the company must verify each employee’s hours. Example: an employee working 16 hours per week for the EMI company and 5 hours as a consultant meets the 75% test (21 hours in total, 76% for the EMI company). Another employee working 20 hours for the EMI company and 10 hours as a self‑employed engineer fails the test because only 66% of their time is with the EMI company.
• Material interest rule: Employees cannot hold or control more than 30% of the ordinary share capital, directly or through associates. EMI options themselves do not count towards this 30% test, so employees can hold options that, when exercised, would exceed 30% without breaching the rule.
• Tax benefits: If employees pay at least market value when granted and exercise within ten years (fifteen years for options granted after 6 April 2026), they pay no Income Tax or National Insurance on exercise. Any gain on sale is taxed as capital gains, and relevant EMI shares can qualify for Business Asset Disposal Relief if they are held for at least two years, allowing gains to be taxed at reduced CGT rates of 14% up to 5 April 2026 and 18% thereafter. Compared with standard CGT rates of 18%  for basic rate taxpayers and 24% for higher rate taxpayers, this relief can cut an employee’s tax bill by 20–30 percentage points.
• Cost of options: Employees do not pay tax on the grant. If the exercise price is below market value, the discount is taxed as employment income. To avoid a discount, companies must agree on a share valuation with HMRC. Undo Capital’s share scheme platform helps companies agree a share valuation with HMRC by providing valuation templates and guidance.
• Notification and compliance: For options granted on or after 6 April 2024, companies must notify HMRC of EMI grants by 6 July following the end of the tax year in which the grant was made, using the Employment Related Securities (ERS) online service. From 6 April 2027, this notification requirement will be abolished entirely. They must also report any disqualifying events within 92 days.

The EMI share scheme is tailored for early‑stage companies that expect significant growth and want to share upside with their team without triggering a punitive tax charge at exercise. For a founder building in fintech, the ability to grant meaningful equity quickly and still comply with HMRC rules can be the difference between hiring top talent and losing them to larger firms. But the scheme comes with caps, industry exclusions and administrative overhead. Understanding those limitations and whether your company can meet the working time and material interest rules is critical before you set up an EMI plan.

What is an unapproved share scheme?

An unapproved share scheme (also called a non‑tax‑advantaged share option scheme) is any arrangement that allows employees to buy shares outside HMRC’s approved frameworks. There is no approval process, so companies of any size or industry can use unapproved options. They are popular with later‑stage scale‑ups that have outgrown EMI limits or with multinationals that cannot meet the independent company test. Because unapproved plans are not restricted by assets or headcount, you can set an unlimited option pool, customise vesting schedules and include overseas employees.

The trade‑off is tax. When an employee exercises an option in an unapproved scheme, the difference between the share’s market value at exercise and the exercise price is treated as employment income. The employer must operate PAYE if the shares are readily convertible assets, meaning there are trading arrangements or a planned exit that gives employees a route to cash. In practice, many growth companies expect to be acquired or to list, so HMRC treats their shares as readily convertible.

Employees therefore pay Income Tax at their marginal rate (20%, 40%, or 45%) plus employee National Insurance of 8% up to the upper earnings limit and 2% above it. Employers pay 15% National Insurance on the same amount. After exercise, any further gain on sale is subject to Capital Gains Tax at standard rates (18%/24 % depending on the shareholder’s income band). There is no access to Business Asset Disposal Relief because the shares were not acquired under EMI.

From a practical standpoint, unapproved schemes are simpler to set up. There is no need for HMRC valuations or notifications, there are no industry or material interest restrictions, and employees are not required to meet a working time test. Companies can even grant options to consultants, non‑employees and overseas staff. However, you must clearly explain the tax consequences. Employees could face a large income tax bill the moment they exercise, which might require selling some shares immediately to fund the tax. Without careful planning, this can erode the motivational benefit of the scheme.

Because unapproved options have no statutory limits, they can also be used alongside an EMI employee share scheme: for example, employees who exceed the £250,000 EMI limit or who fail the working time test can receive unapproved options for the balance. Undo Capital’s share scheme platform supports mixed plans, so you can grant EMI options to eligible staff and unapproved options to others from a single dashboard. The platform also helps plan exercises and estimate tax exposure, giving employees a better understanding of the costs.

EMI scheme disadvantages

While the EMI share scheme offers generous tax breaks, it is not perfect. This section deliberately highlights the EMI scheme's disadvantages, an area competitors often gloss over. Understanding these drawbacks is crucial for founders weighing the two options.

Limitations of the EMI scheme

• Company size caps: As of 2026, your company must have gross assets of £120 million or less and fewer than 500 employees. Before April 2026, the limits were £30 million and 250 employees. Rapidly growing scale‑ups can quickly become ineligible. With valuations soaring in fintech, some businesses outgrow the EMI caps within a year.
• Option pool limits: The total value of options granted under EMI cannot exceed £6 million company‑wide. Employees are capped at £250,000 over a three‑year period. These caps restrict how much equity you can allocate under the tax‑advantaged regime.
• Working time requirement: Each participant must work at least 25 hours per week, or 75% of their time, for the company. This disqualifies part‑time advisers or founders with side projects. If an employee fails the test during the life of the option, a disqualifying event occurs.
• Material interest rule: Employees cannot hold more than 30% of the company’s shares or rights to assets. This prevents founders or major investors from receiving EMI options. Once an employee crosses the 30% threshold, they cannot receive any further EMI options.
• Excluded activities: Companies engaged in banking, farming, property development, legal services or ship building are excluded. Some fintech start‑ups may involve regulated activities that fall on the edge of these exclusions; careful analysis is needed.
• Administrative burden: You must agree a share valuation with HMRC before granting options, notify HMRC of each grant by 6 July following the end of the tax year in which the grant was made, and track disqualifying events. Failing to file on time can invalidate the options. To reduce this burden, many founders use a platform like Undo Capital to automate valuations and filing.
• Valuation volatility: EMI grants must be priced at or above market value. If your share valuation later proves too low, HMRC may impose income tax on the discount. For early‑stage companies where valuations change quickly, this risk is significant.
• Limited exercise window: Even with the extension to 15 years, EMI options expire if not exercised within the stated period. Employees who leave or forget about their options might lose them.

Understanding these EMI scheme disadvantages helps you decide whether EMI is right for every cohort. For some teams, the working time test or valuation requirements may outweigh the tax benefits. A mixed approach, granting EMI options to core employees and unapproved options to advisers or part‑time staff, often works best.

EMI vs unapproved: how to choose

Choosing between an EMI share scheme and an unapproved option depends on your company’s size, growth plans, employee mix and tolerance for administrative effort. A structured comparison reveals the trade‑offs more clearly.

How to decide

The table above summarises the major differences. In practice, founders can run a simple decision process:

1. Check company eligibility. If your gross assets exceed £120 million or you have more than 500 employees (or plan to exceed those thresholds soon), an EMI share scheme is off the table. Similarly, if your trade is an excluded activity, EMI is not available.
2. Assess employee mix. EMI options require a 25‑hour/75% commitment. Advisors, part‑time staff or overseas workers will not qualify. For them, you must use unapproved options.
3. Consider tax appetite. If employees are likely to hold shares to exit, the tax savings of EMI and BADR (18% CGT) can be significant compared with paying up to 45% Income Tax on exercise under unapproved plans. Estimate potential gains and compare after‑tax outcomes. A worked example: an employee with options over 10,000 shares at £1 per share exercises when the market value is £10. Under an EMI plan, the gain on exit (£9 per share) would be taxed at 18% (post‑2026), giving a tax bill of £16,200. Under an unapproved plan, the £9 gain at exercise would attract up to 45% Income Tax and 2% NI (total 47%), leading to a tax bill of £42,300. That difference of more than £26,000 on the same gain illustrates the power of EMI.
4. Evaluate administrative capacity. EMI compliance requires valuations, board minutes, HMRC filings and record keeping. If your finance team is stretched thin, consider using the Undo Capital share scheme platform or outsourcing to specialists. Unapproved schemes are quicker to set up and run, but you must educate employees about the tax due at exercise and possibly operate PAYE.

In many cases, the optimal structure is a hybrid. Eligible employees receive EMI options up to their individual £250,000 cap. Additional grants, advisers and international staff are covered by unapproved options. This approach maximises tax efficiency for those who qualify while providing flexibility for the broader team.

Tax treatment in the UK

The tax outcome is where the real difference between each employee share scheme becomes clear, and it often drives the final decision for both founders and employees.

Income Tax and National Insurance

Under an EMI employee share scheme, employees do not pay Income Tax or National Insurance when the option is granted or exercised, provided they pay at least the market value at grant. If the exercise price is discounted relative to market value, the discount is taxed as employment income and attracts National Insurance. Companies must operate PAYE on any taxable discount. Unapproved options are different: the entire gain at exercise is taxed as employment income. Employees pay Income Tax at 20%, 40%, or 45% depending on their band, and employee NIC at 8% up to the upper earnings limit and 2% above. Employers pay a 15% NIC on the same amount. The tax is collected through payroll if the shares are readily convertible assets.

Capital Gains Tax and BADR

Capital gains arise when the employee sells their shares for more than they paid. For EMI shares, the gain (after any Income Tax on a discount) is taxed as a capital gain. The UK CGT rates from 6 April 2026 are 18% for basic rate taxpayers and 24% for higher rate taxpayers. EMI shares can qualify for Business Asset Disposal Relief (BADR) if they are held for at least two years and the company is a trading company. BADR reduces the CGT rate on qualifying gains to 14% for disposals between 6 April 2025 and 5 April 2026 and to 18% for disposals on or after 6 April 2026. The relief has a lifetime cap of £1 million per individual. In contrast, gains on unapproved shares are taxed at standard CGT rates with no access to BADR, because the shares were not acquired under a qualifying scheme.

Interaction with dividends and other taxes

Shareholders can receive dividends on shares acquired through either scheme. Dividends are taxed separately at the dividend tax rates and are not covered by the EMI or unapproved share scheme rules. Dividends can be an additional benefit of holding shares rather than exercising options immediately. Companies should also consider corporation tax deductions: under current law, the employer may obtain a corporation tax deduction equal to the amount subject to Income Tax at the exercise of unapproved options, while EMI shares may also attract a deduction when options are exercised. Founders should consult a tax adviser for details.

Next steps

Undo Capital’s share scheme platform helps UK start‑ups and scale‑ups structure and issue employee share schemes compliantly, without the legal fees of a traditional solicitor. The platform provides tools to agree a share valuation with HMRC, generate share option agreements and manage your cap table after issuing options.

As a next step, assess whether your company meets the EMI eligibility criteria and calculate the potential tax savings for your team. If you qualify, set up an EMI plan; if not, design an unapproved EMI share option scheme that aligns with your growth strategy. In either case, consult specialists and use purpose‑built software to stay compliant and transparent. For further reading, see our guides on EMI scheme eligibility requirements, agreeing a share valuation with HMRC, share option agreement templates and managing your cap table after issuing options.