Share Schemes Explained: Smarter, Tax-Efficient Incentives for Senior Staff
As employer payroll costs continue to rise, many businesses are reassessing how to structure remuneration packages for senior staff. Traditional pay structures remain important, but share-based incentive plans are increasingly used to strengthen employee engagement, support long-term growth, and manage employment costs more effectively.
This article outlines several different long-term incentive plans available, their potential advantages, and how they may help businesses attract and retain key staff in a tax-efficient and commercially effective manner.
Contents
Background: Rising Employment Costs
In the Autumn Budget, the government announced that from 6 April 2025:
- Employer NICs (Class 1, 1A and 1B) have increased from 13.8% to 15%.
- The Secondary Threshold for employer NICs has fallen from £9,100 to £5,000.
- The Employment Allowance will rise to £10,500, offering some relief for eligible businesses.
These measures are expected to increase the cost of employing staff, particularly for employers who do not qualify for the Employment Allowance or who already fully utilise it.
At the same time, businesses continue to face a highly competitive recruitment landscape, with limited availability of skilled staff. Many employers are exploring whether traditional remuneration packages remain fit for purpose.
Traditional Remuneration
Under a typical remuneration structure, senior employees are commonly remunerated through a mix of:
- Fixed salary
- Performance-related bonus
- Benefits-in-kind (e.g. company car, private medical, health insurance)
While this model is well established, it can be expensive from both a cash flow and tax perspective. Employees may face a combined tax rate of income tax and NICs of up to 47% on salary and bonuses. Employers also incur Class 1 NICs at 15% on amounts above the £5,000 threshold.
Similarly, on the receipt of many benefits which are non-cash convertible, the ‘cash equivalent’ value of those benefits will be subject to income tax at a rate of up to 45% in the hands of the employee and to Class 1A NICs at a rate of 15% by the employer. Any benefits which can be converted into cash are instead taxed as if they were salary or a bonus.
The employer will, however, generally be entitled to corporation tax relief on the cost incurred in providing any salary, bonus or benefit, as well as on any associated employer NICs. For non-cash benefits, the deductible amount is based on the employer’s expenditure, not the benefit’s cash equivalent value for tax purposes.
Share-Based Alternatives
Given the recent rise in employment costs and the increasing competition for skilled staff, many businesses are considering share incentive plans as an alternative or complementary component of their remuneration strategy.
A company share plan enables the business owners to offer equity participation to key employees, typically subject to pre-determined conditions such as length of service or the achievement of specific performance targets. When implemented effectively, such plans can enhance employee motivation and retention, while aligning employee interests with those of the existing shareholders. This can lead to increased productivity and long-term value creation for the business.
Where the relevant qualifying conditions are met, a tax-advantaged share plan is generally the preferred route, offering the same commercial benefits as other forms of equity participation but with significantly enhanced tax efficiency. These schemes can allow shares to be awarded at a lower overall cost to both the employee and the employer, provided the structure is correctly implemented and all compliance requirements are met.
Where a tax-advantaged scheme is not feasible—either due to eligibility restrictions or the need for greater flexibility around participant criteria or award structure—a non-tax advantaged share plan may be considered. However, where shares are awarded at undervalue, this will ordinarily give rise to an income tax charge for the participating employee under the rules for Employment Related Securities.
In addition, If the shares are classified as a Readily Convertible Asset (RCA)—for example, where trading arrangements exist or a corporation tax deduction is not available—the employer must operate PAYE on the value of the award, and the amount is also subject to Class 1 NICs for both the employer and the employee.
Note: All share-based arrangements require careful planning, particularly around share valuation, shareholder agreements, and Articles of Association. These legal and commercial aspects must be considered alongside tax efficiency.
Tax-Advantaged Share Schemes
There are four main types of tax-advantaged share schemes available under UK legislation:
- Share Incentive Plans (SIPs)
- Save As You Earn (SAYE)
- Company Share Option Plans (CSOPs)
- Enterprise Management Incentives (EMIs)
This article focuses on EMI and CSOP schemes, which are the most commonly implemented by privately owned and growth-stage businesses. Both are discretionary arrangements, allowing employers to select specific key individuals typically based on performance, seniority or strategic contribution.
By contrast, SIPs and SAYE are all-employee schemes, requiring companies to offer participation on broadly equal terms to all eligible employees. As such, they are generally more suited to larger or listed businesses with established HR infrastructure and broader employee equity strategies. These schemes are not considered further in this article.
Enterprise Management Incentive (EMI)
The EMI scheme is the most flexible and widely used share option plan for smaller trading companies. It allows selected employees to be granted options that enable them to acquire shares in the company, subject to individually tailored performance or time-based conditions.
Key Features:
- Available to independent UK trading companies with gross assets under £30 million and fewer than 250 full-time equivalent employees.
- EMIs can be used to give options to selected employees over shares worth up to £250,000 per employee.
- There is no tax charge on the grant of the option.
- Options granted at market value do not give rise to income tax or NICs if exercised within ten years of the date of grant.
- If options are granted at a discount to market value, income tax (and potentially NICs) will arise on the discount element at exercise.
- On a subsequent sale of the shares, any growth in value (not otherwise taxed) is taxed as a capital gain, rather than income.
- Where conditions are met, including a combined option and shareholding period of at least 24 months, and the individual has remained an employee or officer throughout, any gain may qualify for Business Asset Disposal Relief (BADR), resulting in a 14% CGT rate (rising to 18% from 6 April 2026) rather than the standard 24% applicable to higher-rate taxpayers.
Provided the scheme is implemented correctly, EMIs offer a significant tax saving compared to cash bonuses or non-tax advantaged equity. These benefits can be lost if disqualifying events occur, so ongoing compliance and proper record-keeping are essential.
EMI is particularly attractive to unlisted, high-growth companies that wish to reward and retain key individuals without immediate cash outlay. Professional advice should always be sought to ensure eligibility and correct implementation.
Company Share Option Plan (CSOP)
A CSOP is a discretionary tax-advantaged share scheme that allows selected employees to acquire shares via options in their employing company. It offers similar income tax and NIC benefits to EMI, but with broader company eligibility and more rigid structural requirements.
Key Features:
- Available to a wider range of companies, provided they meet HMRC’s eligibility criteria.
- Options can be granted over shares with a total value of up to £60,000 per employee.
- There is no tax charge on the grant of the option.
- No discount can be given, i.e. the option price cannot be less than the market value at the date of grant.
- If the options are exercised between three to ten years after grant, there is no income tax or NIC charge on exercise.
- If the options are exercised outside of the above time window, income tax (and potentially NICs) will apply on any increase in value.
- On a subsequent sale of the shares, any growth in value (not otherwise taxed) is taxed as a capital gain, rather than income.
Provided the scheme is implemented and operated within the statutory framework, a CSOP can offer a tax-efficient means of incentivising employees. While the available tax reliefs are less generous than under EMI—most notably due to the lower individual option limit and more restrictive access to capital gains tax reliefs—CSOPs are available to a wider range of companies and offer greater flexibility in terms of corporate structure and employee eligibility.
CSOPs are often used by companies that do not qualify for EMI, including companies with excluded activities, or those seeking to include employees who may not meet EMI working time requirements. Professional advice should be obtained to confirm eligibility and to ensure the scheme is structured and administered correctly.
Non-Tax Advantaged Share Schemes
Where a tax-advantaged share plan is not feasible or appropriate, a business may consider a non-tax advantaged scheme as an alternative. These arrangements offer greater flexibility in terms of participant eligibility, timing, and share value, but do not benefit from the favourable tax treatment available under statutory plans such as EMI or CSOP.
Non-tax advantaged schemes may take the form of:
- Acquisition schemes, under which employees are given free or discounted shares; or
- Share option schemes, under which employees are granted rights to acquire shares at a future date.
These schemes are often used where a company wishes to offer awards of greater value than permitted under tax-advantaged limits, or where it cannot meet the qualifying conditions for statutory schemes. However, they carry a higher tax burden for both employer and employee, particularly where the shares are treated as RCAs.
In most cases:
- There is no income tax charge on the grant of an option.
- A charge to income tax (and potentially NICs) will arise on exercise/award, based on the difference between the market value at exercise/award and the amount paid by the employee.
- Where the shares are RCAs (e.g. listed shares or shares where no corporation tax deduction is available), this amount is also subject to PAYE and Class 1 NICs.
- In some cases, particularly under non-tax advantaged schemes, the employer’s NIC liability on exercise/award is contractually transferred to the employee. Where this applies, the employer’s NIC is treated as an additional cost of acquiring the shares, and the amount chargeable to income tax is reduced accordingly.
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On subsequent sale, CGT may arise on any uplift in value above the original base cost, which includes the following:
- the amount paid by the employee for the shares; and
- the full amount charged to income tax at exercise or award, before any relief for secondary NICs borne by the employee.
While non-tax advantaged schemes can offer commercial flexibility—particularly where larger awards or bespoke participation terms are required—they come with a higher and more complex tax burden. Careful structuring is essential to manage income tax and NIC exposure, ensure accurate CGT reporting, and to meet ongoing reporting requirements. Specialist advice should always be sought to ensure that the arrangements are commercially effective and compliant from both a legal and tax perspective.
Growth Shares
Growth shares are a flexible equity incentive typically used when tax-advantaged plans (such as EMI or CSOP) are not suitable. Commonly adopted by privately owned companies, they allow selected employees—usually senior managers or directors—to participate in future equity growth above a specified hurdle.
Key Features:
- A separate class of shares is created, which only accrues value once the company exceeds a pre-agreed valuation hurdle. This significantly lowers the day-one market value of the shares and the associated dilution of existing share capital.
- Employees are either required to pay market value for the growth shares or are taxed on that value at acquisition. The initial tax charge is typically modest due to the depressed starting value.
- In most cases, the shares will be classed as ‘restricted securities’, which can trigger additional events subject to income tax unless a s.431 election is made to opt out of the restricted securities regime. The election allows the employee to pay tax on the unrestricted market value upfront, avoiding future income tax charges under ITEPA 2003.
- On disposal, any increase in value above the base cost is typically subject to CGT rather than income tax, allowing for lower overall tax exposure.
Commercial and Practical Considerations:
- Growth shares are especially suited to exit-focused scenarios, such as trade sales or IPOs, where the value uplift and realisation are clearly measurable.
- The valuation methodology is critical: shares must be properly valued in line with accounting share-based payment option pricing methodologies such as Black-Scholes, and the hurdle must be carefully calibrated.
- Legal implementation includes amending the company’s articles of association, passing appropriate shareholder resolutions, and filing with Companies House. The scheme must also be registered with HMRC as an ‘other’ ERS arrangement, with annual reporting obligations.
- Growth shares can work well for businesses looking to incentivise key individuals without immediate dilution of existing shareholders, but careful design and documentation are essential to avoid unintended tax consequences.
When structured and implemented correctly, growth shares offer a commercially effective way to link reward with future performance. However, the technical and legal complexity—particularly around valuation, restriction terms, and tax treatment—means specialist advice should always be sought at the planning stage.
Corporation Tax Deductions
Where an employer provides shares or options to employees, a statutory corporation tax deduction may be available under Part 12 CTA 2009. This applies to both tax-advantaged and non-tax advantaged schemes, provided the employee is chargeable to income tax on acquisition.
The amount of the deduction typically equals the difference between the market value of the shares and any amount paid by the employee—either at acquisition (for gifted shares) or at exercise (for options). The deduction arises in the accounting period in which the shares are acquired, not when the option is granted or when the accounting expense is recognised under UK GAAP.
To qualify, the shares must:
- Be ordinary shares, fully paid and non-redeemable; and
- Be in a listed company, a standalone company (listed or unlisted), or a subsidiary of a listed company.
Importantly, subsidiaries of unlisted companies do not qualify. Where this condition is not met, no corporation tax deduction is available under Part 12. In such cases, the shares are also treated as RCAs, meaning PAYE and NIC obligations will arise on any income tax charge at acquisition or exercise.
It is also worth noting that a deduction is not available simply because an expense has been booked in the accounts—only the statutory amount is deductible.
Reporting Obligations
Where shares are subject to the Employment Related Securities (ERS) rules, employers must report certain share-related events to HMRC by 6 July following the end of the relevant tax year.
These obligations apply regardless of whether the arrangement is tax-advantaged or not and failure to report on time can lead to penalties, loss of tax reliefs, or disqualification of the scheme.
A return must be made online via the ERS service for each reportable event, including:
- The grant or exercise of share options
- The award or acquisition of shares, including free or discounted shares
- Any chargeable event, such as lifting of restrictions, early disposals, or other actions giving rise to taxable income
Responsibility for reporting typically rests with the employer, or with the person from whom the securities were acquired (e.g. a parent company).
Key Takeaways
As businesses face sustained upward pressure on employment costs and increasing competition for skilled staff, the structure of senior remuneration packages is coming under closer scrutiny.
Share-based incentive plans—whether tax-advantaged or not—offer a way to align employee and shareholder interests, reward long-term contribution, and reduce reliance on salary-driven pay structures. However, the tax, legal, and administrative considerations are complex and vary significantly depending on the nature of the plan.
In summary:
- Tax-advantaged schemes such as EMI and CSOP remain the gold standard for privately owned and growth-stage businesses, offering significant tax savings for both employer and employee—provided the relevant conditions are met on an ongoing basis.
- Non-tax advantaged plans offer more flexibility but come with a higher tax burden. PAYE and NICs often apply, and careful structuring is essential to manage risk.
- Growth shares are a popular alternative where EMI or CSOP is not suitable, particularly in exit-focused scenarios. When properly designed and implemented, they can replicate many of the benefits of a tax advantaged scheme—but with greater commercial complexity.
- Corporation tax relief is often available for the employer, but only where specific statutory conditions are satisfied. Eligibility and other tax implications should be considered early, particularly where the issuing company is a subsidiary of a group.
- Reporting obligations apply to all employment-related share schemes and must be completed by 6 July each year. Late or incorrect filings can result in penalties and, in some cases, the loss of scheme benefits.
Done well, long-term incentive plans can be a powerful and cost-effective tool to attract, retain and motivate key employees. But success hinges on the right design, clear documentation, and early professional advice.
Get in Touch
We support businesses in assessing and implementing appropriate remuneration strategies, including share-based incentive plans. We can help you:
- Evaluate the suitability of a share plan
- Compare tax advantaged and non-tax advantaged options
- Design a commercially effective structure
- Liaise with legal advisors on implementation
- Manage HMRC reporting requirements
If you’re considering share-based payments as part of your remuneration strategy, contact us today to arrange a free initial consultation. We’ll help you understand your options—and avoid common pitfalls—so you can make an informed decision with confidence.
This article provides general information and should not be considered professional advice. It reflects legislation and practices at the time of writing, which may change. Individual circumstances vary, so please consult us before taking any action. We accept no responsibility for financial loss arising from actions taken without our written advice.
Liam O'Riordan
As Principal at Veritas ATS, I help start-ups, owner-managed businesses, and individuals simplify accounting and tax, providing clear, practical solutions tailored to their needs.
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