Employee Share Options Tax: EMI, SAYE and Unapproved Options

The tax you pay on employee share options depends almost entirely on which scheme granted them. Tax-advantaged options (EMI and SAYE) normally escape income tax and National Insurance altogether, leaving only Capital Gains Tax when you sell the shares; unapproved options are taxed as employment income on the profit at the moment you exercise, then CGT on any further growth.

That difference can easily be 20 to 30 percentage points of tax on the same paper profit, so it is worth knowing exactly which category your options fall into before you press exercise.

Key points

• EMI options granted at market value: no income tax or NI at grant or exercise, CGT on sale at 18% or 24%.
• SAYE (Sharesave): the up-to-20% discount is tax-free, and shares can move into an ISA within 90 days of maturity to kill off future CGT.
• Unapproved options: income tax at 20/40/45% (Scotland 19–48%) on the exercise profit, plus employee NI at 8% or 2% if the shares are readily convertible.
• Exercising and selling are two separate tax events with two separate dates — they only collapse into one if you sell immediately.
• The Capital Gains annual exempt amount is £3,000, and Business Asset Disposal Relief can apply to EMI shares without the usual 5% shareholding test.

The three schemes at a glance

EMI share options tax

Enterprise Management Incentives are the most generous employee share scheme in the UK tax system. If the option was granted with an exercise price at least equal to the market value of the shares on the grant date, there is no income tax and no National Insurance when you exercise, however much the shares have grown. Your only tax event is the eventual sale.

The qualifying conditions

EMI is deliberately narrow. Broadly, the company must be independent, carry on a qualifying trade (property development, banking, farming and most professional services are excluded), have gross assets of no more than £30m and fewer than 250 full-time equivalent employees. You must be an employee or director working at least 25 hours a week, or 75% of your working time, and must not control more than 30% of the company.

There are also caps: up to £250,000 of unexercised options per employee (measured at grant-date value) and £3m across the company. Options must be exercised within 10 years of grant, and the company must notify HMRC of the grant by 6 July following the end of the tax year in which the option was granted. A late notification can strip the tax advantages entirely, which is the single most common way EMI goes wrong.

Worked example: EMI from grant to sale

You are granted options over 20,000 shares at £1 each, which is the agreed market value at grant. Four years later you exercise, paying £20,000 when the shares are worth £5. A trade sale then values them at £8.

• At exercise: no income tax, no NI, even though the shares are worth £100,000.
• Sale proceeds: 20,000 × £8 = £160,000.
• Base cost: the £20,000 you paid. Gain = £140,000.
• Less the £3,000 annual exempt amount = £137,000 taxable.
• As a higher-rate taxpayer at 24%: £32,880 of CGT.

If the same profit had come through an unapproved option, most of it would have been taxed as salary at 40% or more, with NI on top.

Disqualifying events

Certain events — the company ceasing to qualify, a takeover, or you dropping below the working-time requirement — are "disqualifying events". You then have 90 days to exercise and keep full relief. Exercise later and the growth in value between the disqualifying event and exercise is taxed as employment income, with the earlier growth still tax-free.

SAYE tax (Sharesave)

Save As You Earn is the all-employee scheme run by most large listed employers. You agree to save a fixed amount from net pay each month — between £5 and £500 — for three or five years, and at the end you can either take your savings back with any bonus or use them to buy shares at a price fixed at the start, which can be discounted by up to 20% of the market value at grant.

The tax treatment is simple: the discount is not taxed, there is no income tax or NI at maturity, and any interest or bonus on your savings is tax-free. The only possible tax is CGT on the difference between what you paid for the shares and what you sell them for.

Worked example: a three-year SAYE plan

You save £250 a month for 36 months, so £9,000 in total. The market value at grant was £4, so with the maximum 20% discount your option price is £3.20.

• Shares you can buy: £9,000 ÷ £3.20 = 2,812 shares (cost £8,998.40, with the £1.60 balance returned).
• Share price at maturity £6, so the shares are worth 2,812 × £6 = £16,872.
• Sell immediately: gain = £16,872 − £8,998.40 = £7,873.60.
• Less the £3,000 exempt amount = £4,873.60 taxable. At 24% that is £1,169.66 of CGT.

There is a way to avoid that. Shares acquired through SAYE (or a Share Incentive Plan) can be transferred into a stocks and shares ISA within 90 days of exercise without triggering CGT, subject to the £20,000 annual ISA subscription limit. Once inside the ISA, all future growth and dividends are tax-free. A transfer into a pension is also possible. Miss the 90-day window and the shares are simply ordinary taxable holdings.

Unapproved options: the income tax route

"Unapproved" (properly, non-tax-advantaged) options have no statutory conditions, so employers use them for consultants, overseas staff, large grants and companies that fail the EMI tests. The price is that exercise is an employment income event.

On exercise you are taxed on the market value of the shares at that date, less anything you paid for them and less anything you paid for the option. That amount goes on top of your other income for the year, so it is taxed at 20%, 40% or 45% in England, Wales and Northern Ireland, and at Scottish rates of 19% to 48% for Scottish taxpayers (share option gains are non-savings income, so Scottish rates apply).

If the shares are readily convertible assets — broadly, listed shares or shares with a ready market, such as on a sale — the employer must operate PAYE and employee National Insurance at 8% up to £50,270 of earnings and 2% above. Employer NI at 15% also applies, and many option agreements allow the employer to pass that cost to you by joint election. If it does, the amount you bear is deducted from the employment income charge, so you get income tax relief on it, but you are still worse off overall. For unlisted shares with no market, there is usually no NI and the charge is reported through Self Assessment instead.

Worked example: unapproved exercise and later sale

You hold 10,000 unapproved options with a £1 exercise price. You exercise when the shares are worth £6, while already earning above £50,270.

• Employment income on exercise: 10,000 × (£6 − £1) = £50,000.
• Income tax at 40% = £20,000. Employee NI at 2% = £1,000. Total £21,000.
• A Scottish higher-rate taxpayer at 42% would pay £21,000 of income tax plus the same £1,000 NI.
• Your CGT base cost becomes £60,000 — the £10,000 paid plus the £50,000 already taxed.
• Sell two years later at £8: gain = £80,000 − £60,000 = £20,000. Less £3,000 = £17,000 at 24% = £4,080.

Two side effects matter. A large exercise can push adjusted net income past £100,000, where the Personal Allowance tapers away at £1 for every £2, creating an effective 60% marginal rate on that slice. It can also drag you into the High Income Child Benefit Charge, which applies between £60,000 and £80,000. You can model the whole year with the income tax calculator.

Exercising vs selling: two events, two dates

The most expensive mistake with share options is treating exercise and sale as the same thing. Exercise fixes your income tax position and your CGT base cost. Sale fixes your gain. If the share price falls between the two, you can be left paying income tax on a profit you never banked — and a later capital loss cannot be set against that earlier income tax charge.

Practical points to keep straight:

• Same-day exercise and sale (often called a cashless exercise) removes price risk and, for unapproved options, means the tax is deducted from the proceeds through payroll.
• Holding after exercise starts your CGT clock and, for EMI, may be necessary for Business Asset Disposal Relief.
• Restricted shares: if the shares you acquire carry restrictions, a joint section 431 election made within 14 days of acquisition taxes you on the unrestricted value now so all later growth is capital, not income.
• Reporting: gains on disposal go in the Capital Gains pages of your tax return if proceeds or gains exceed the reporting limits, or through HMRC's real-time service. See GOV.UK on tax and employee share schemes.

BADR on EMI shares

Business Asset Disposal Relief normally requires you to hold at least 5% of the ordinary share capital and voting rights for two years. EMI shares are excused that 5% test, which is what makes the relief realistic for ordinary employees with small stakes. Instead you generally need the option to have been granted at least 24 months before the disposal, and you must have been an employee or officer of the company throughout that period.

BADR reduces the CGT rate on qualifying gains up to a £1m lifetime limit. For 2026/27 the BADR rate is 18%, compared with the standard 24% higher-rate CGT rate. Taking the EMI example above, a £137,000 taxable gain would cost £32,880 at 24% but £24,660 at 18% — a saving of £8,220. Note that because the basic-rate CGT rate is also 18%, BADR only helps where your gain would otherwise be taxed at 24%.

Two timing traps are worth flagging. First, the two-year clock runs from grant of the EMI option, not from exercise, so exercising shortly before a sale does not automatically break the relief. Second, if the options were exercised only on completion of a sale, the shares still need to qualify — the rules look at the option grant date, so options granted within two years of the exit will not attract BADR.

What to do next

Work out which scheme your options sit in, then model the two events separately: the income tax and NI at exercise (if any), and the CGT on sale. Run the disposal side through the Capital Gains Tax calculator to see the effect of the £3,000 exempt amount and whether your gain falls in the 18% or 24% band, and use the income tax calculator to check whether an exercise tips you over £100,000 or into the Child Benefit charge. If your company's plan documents are not clear about which scheme you hold, ask for the option agreement and the grant-date valuation before you exercise.