Overview
Employers can reward key staff with equity (shares) in several ways. The tax treatment varies dramatically depending on whether shares are gifted outright, granted via standard (non‑EMI) options, or granted under the government‑approved Enterprise Management Incentives scheme (EMI).
Route 1 — Immediate Share Gift
Mechanics: Employer gifts 5,000 shares worth £30,000 (£6 per share valuation at date of gift). Shares are then sold at £20 per share when the business is sold.
Tax Steps
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Income tax on gift value: £30,000 × 40% = £12,000
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CGT on sale: (£100,000 – £30,000) × 24% = £16,800
Total tax: £28,800
Key features
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Large upfront tax bill for the employee
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No NIC
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CGT applies on future growth
Route 2 — Non‑EMI Options (Exercise at YEAR 3)
Mechanics: Options granted at £0.01 (gift =ed value =£50 .... 5,000 shares X £0.01); exercised when shares are worth £12 (doubled up from £6 per share). 5,000 shares now worth £60,000 at exercise. Business is then sold at year 6 for £20 per share.
Tax Steps
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Income tax on exercise: £59,950 (£60,000 - £50) × 40% = £23,980
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CGT on sale: (£100,000 [5,000 shares X £20] – £60,000) × 24% = £9,600
Total tax: £33,580
Key features
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Higher income tax because value has risen before exercise
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No NIC
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CGT only applies to post‑exercise growth
Route 3 — Non‑EMI Options (Exercise on BUSINESS SALE)
Mechanics: Options exercised at year 6 exit when shares are worth £20 (original grant 5,000 shares X £0.01 = £50). 5,000 shares @ £20 worth £100,000 on sale.
Tax Steps
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Income tax on exercise: £99,950 (£100,000-£50) × 40% = £39,980
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NIC (employee): up to 15.8% = £15,792
Total tax: £55,772
Key features
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Highest tax burden
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Income tax + NIC because exercise happens at sale
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No CGT (all value taxed as income)
Route 4 — EMI Options (Exercise on BUSINESS SALE)
Mechanics: EMI options granted at £0.01 (5,000 shares X £0.01 = £50 paid for options) when shares are worth £6 (Grant Value = 5,000 shares X £6 price when option granted = £30,000) and then exercised at sale in year 6 when shares are worth £20.
Tax Steps
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Income tax based on grant value: £29,950 (£30,000 less £50) × 40% = £11,980
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CGT on sale: (£100,000 – £30,000) × 24% = £16,800
Total tax: £28,780
Key features
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Income tax frozen at grant value — huge saving
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No NIC
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CGT applies on future growth
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Tax outcome similar to an immediate gift but without upfront cost
Summary — Total Tax Paid
Key Insights for Employers
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EMI delivers the lowest tax burden except for an outright gift — and avoids the upfront £12,000 income tax hit.
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EMI freezes the taxable value at grant, protecting employees from rising share values.
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No NIC under EMI, unlike non‑EMI exercised at exit.
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EMI options cost almost nothing to grant (exercise price £0.01 per share).
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If the business is never sold, Helen has paid just £20 of income tax (40% of £50 options gifted i.e. 5,000 shares X £0.01) and still retains upside.
Takeaway
For growth‑stage companies expecting a future sale, EMI is almost always the optimal route. It gives employees meaningful upside with minimal upfront cost and avoids the punitive income tax/NIC exposure of non‑EMI options.
