Incentives broadly fall into three categories – share options, shares and cash. We have set out brief details of the more popular incentives below.
Share Options
A share option gives an employee the right to acquire shares in the future, at a price agreed when the option is granted. They can be used to reward growth (by setting the option exercise price at the share value at the date of grant) or to pass the whole value of the shares (by setting the exercise price at nominal value). Some share options carry attractive tax advantages.
Enterprise Management Incentive (EMI) options
If a company qualifies for EMI options, it is typically the most popular incentive. The qualifying criteria are improving from 6 April 2026 and this note is written as if that date has passed and the proposed changes brought in. The incentive is designed for smaller companies; key qualifying criteria include:
- 500 or fewer full time equivalent employees;
- gross assets £120m or below;
- individual employees receiving options over no more than £250k of share value (assessed at grant),
- a limit of £6m of value across all employees; and
- recipients being employees working at least three quarters of their working time for the company (or alternatively at least 25 hours a week on average).
EMI options cannot be given over shares in a company controlled by another company, typically meaning it is in the holding company of a corporate group.
If the exercise price is set at market value at grant, all gains are subject to CGT as opposed to employment taxes. In addition, the company gets a corporation tax deduction for that gain (meaning the company typically saves more tax than the employees pay, and net tax cost is negative). Employees can also benefit from the lower BADR CGT rates (18% from April 2026), without needing a 5% shareholding in the company (and share holding periods are aggregated with option holding periods). The scheme can be issued to select employees (it does not need to be given to all employees) and there is a lot of potential flexibility around exercise and vesting conditions.
Company Share Option Plan (CSOP)
A CSOP might be chosen where a company is too large for EMI options. If EMI is available, it is a better choice in our view. It can also be given to select employees (like EMI), and must be given over shares in a company not controlled by another company (like EMI). Individual employees can receive options over no more than £60k of share value (assessed at grant).
The option exercise price must not be less than market value at the time of grant. Broadly, the options are intended to be exercised at least three years after grant. Provided this is the case, there are also no employment taxes on exercise (like EMI), with the gain subject to CGT instead.
Save as you Earn (SAYE) and Share Incentive Plans (SIPs)
These are typically used by large companies and both schemes are for all employees of a company. A SAYE scheme allows employees to save monthly and then tax efficiently buy shares after three or five years. A SIP allows a relatively small amount of share value to be gifted or tax efficiently acquired annually. These are rarely attractive choices for smaller, high growth companies.
Unapproved share options
These have no tax advantages, but are the most flexible. It is the only option choice for non-employees.Assuming recipient is an employee, there is no tax on option grant, but employment taxes on the difference between exercise price and share value when options are exercised. Employment taxes might be due via PAYE or self-assessment depending on external factors.
Shares
Issuance of shares
If the shares are valuable when received, there will either be a high cost for the employee or high tax charge for the employee. This often makes issuing ordinary shares an unattractive incentive (unless a company is very low value, for example relatively newly formed), as the expense might be several years before value is received. It is the quickest and cheapest way to incentivise employees, though it is worth considering a shareholders agreement, amending Articles of Association to allow for clawbacks, and possibly using a nominee structure if numerous employee shareholders would be administratively difficult.
Growth Shares
Growth shares are a new class of shares which participate in value above a "hurdle" set at the date the shares are issued. Typically, the "hurdle" is set a little higher than the share value at the date of grant. The effect is that the growth shares are relatively low value at the outset (removing the high cost / high tax charge above), and benefit in future growth of the company.
This is often the favoured choice for non-employees, or where EMI is not available. The growth in value is subject to CGT.
Long term incentive plan (LTIP)
LTIPs do not carry any tax advantages but are very flexible. Often, they are given to senior executives. An LTIP can take many forms, including conditional share awards, nil cost options and forfeitable share awards.
Cash
Bonuses
Well understood, and while not tax efficient, can be very incentivising for employees, and very flexible in their terms.
Phantom share schemes
These are cash bonuses, but the bonus size is directly linked to the value of the company's shares, ensuring employees benefit from the same growth shareholders benefit from. No actual shares are issued or transferred however, and the awards are taxed as a cash bonus is taxed. Careful messaging is required to ensure employees recognise the value despite incurring more tax than actual shareholders.
To find out more contact Matt Spencer or Kirsty Poulton.
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