What Are Share Options and How Are They Taxed in the UK?
By Georgia Holmes
Share options give employees the opportunity to buy company shares at an agreed price. Learn how they work, how UK tax rules apply when you exercise or sell them, and what to consider before making a decision.
Share options can give employees the opportunity to buy shares in their employer's company at a set price, potentially allowing them to benefit if the business grows in value.
They are often offered as part of a remuneration package, particularly by start-ups and growing businesses looking to attract and retain employees. However, share options can be complex, and the tax you pay depends on the type of scheme, when you exercise your options and when you eventually sell the shares.
Read on to learn how share options work, the main UK schemes available and what you need to know about the tax implications.
What are share options?
A share option gives you the right to buy shares in a company at a specified price, known as the exercise price. You do not usually own the shares when the options are first granted.
Your employer may allow you to exercise your options after a certain period or when specific conditions are met. These conditions can include staying with the company for a set number of years or achieving performance targets.
For example, suppose your employer grants you options to buy 1,000 shares at £2 each.
If the shares are worth £7 each when you exercise your options, you could buy them for £2,000 even though their market value is £7,000. The difference is £5,000 before any relevant tax or costs.
However, you would normally need to pay the £2,000 exercise cost, and you may not be able to sell the shares immediately. If the share price falls below £2, the options may have no financial value.
What types of share option schemes are available in the UK?
The tax treatment depends partly on whether your options are granted through a recognised tax-advantaged scheme or an unapproved arrangement.
Enterprise Management Incentives (EMI)
EMI is a tax-advantaged share option scheme designed for qualifying companies and employees. It is often used by smaller, growing businesses to reward employees and encourage long-term commitment.
If the scheme meets the relevant conditions, you can generally exercise qualifying EMI options without paying Income Tax or National Insurance on the increase in share value between the grant and exercise dates.
Different rules may apply if the options were granted at a discount or if a disqualifying event occurs. Eligibility requirements also apply to the company, employee and options.
Company Share Option Plans (CSOP)
A CSOP allows eligible employees to receive options over company shares, subject to scheme rules and limits.
Where the conditions are met, exercising the options within the permitted period can avoid Income Tax and National Insurance on the difference between the exercise price and the shares' market value.
Tax may still be payable when you sell the shares, depending on the circumstances.
Unapproved share option schemes
Some employers offer options outside the recognised tax-advantaged schemes. These are commonly known as unapproved share options.
They can still be valuable, but they generally do not receive the same tax advantages as qualifying EMI or CSOP options. Income Tax…