Unapproved options, also known as non-EMI options, are share options granted outside HMRC-approved tax-advantaged schemes such as EMI (Enterprise Management Incentives). They give individuals the right to acquire shares in a company, but without the favourable tax treatment associated with EMI.
These options are commonly used when a company or individual does not meet EMI eligibility criteria. While the mechanics are similar to EMI, covering vesting, strike price and exercise, they are treated differently for tax purposes.
For many startups, unapproved options provide a flexible alternative when EMI cannot be used.
Unapproved options (non-EMI), meaning
The meaning of unapproved options centres on flexibility, accessibility and broader applicability. They allow companies to grant equity incentives beyond the limits of HMRC-approved schemes.
To define unapproved options in practical terms, they typically involve:
- Standard option mechanics: including vesting schedules, strike price and exercise conditions
- No HMRC approval: not governed by EMI rules or tax-advantaged frameworks
- Broader eligibility: can be granted to individuals who do not qualify for EMI
- Tax treatment as income: gains are usually taxed as employment income on exercise
- Subsequent capital gains exposure: further growth after exercise may be subject to capital gains tax
A clear, unapproved options definition highlights that while structurally similar to EMI, the key difference lies in taxation.
Why unapproved options matter in equity planning
Unapproved options play an important role in enabling companies to extend equity incentives beyond strict regulatory boundaries.
Their importance includes:
- Providing flexibility: allowing companies to grant options where EMI is not available
- Supporting diverse teams: including advisors, consultants and international employees
- Overcoming EMI limits: applicable when individuals exceed EMI thresholds on value or working hours
- Maintaining incentive alignment: ensuring key contributors can still participate in equity upside
- Complementing EMI schemes: forming part of a broader, inclusive equity strategy
For founders, unapproved options ensure that equity incentives remain accessible across different roles and jurisdictions.
How unapproved options work in practice
In practice, a company grants options to an individual under a standard option agreement. These options are subject to a vesting schedule and can be exercised at a predetermined strike price.
For example, an advisor may receive unapproved options that vest over two years. Once vested, the advisor can exercise the options by paying the strike price and acquiring shares.
The key distinction arises at the point of exercise. Any gain, the difference between the strike price and the market value of the shares, is typically treated as income and taxed accordingly. This contrasts with EMI options, which often benefit from more favourable tax treatment.
After exercise, any further increase in value may be subject to capital gains tax when the shares are sold.
Where Undo Capital fits in the equity incentive strategy
For founders designing equity plans, Undo Capital provides practical guidance on when and how to use unapproved options effectively.
Rather than relying solely on EMI, Undo Capital helps structure a balanced approach that accommodates different team members, jurisdictions and regulatory constraints. This ensures that all contributors can participate in the company’s success, even where tax-advantaged schemes are not available.
By combining flexibility with clear structuring, companies can build inclusive and effective equity incentive programmes.
FAQs
What are unapproved options?
They are share options granted outside HMRC-approved schemes like EMI.
How are unapproved options taxed?
Gains are typically taxed as income at the point of exercise.
Who can receive unapproved options?
Advisors, contractors, overseas employees or individuals who do not qualify for EMI.
Why use unapproved options instead of EMI?
They provide flexibility when EMI eligibility rules cannot be met.
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