There are various routes to success with share incentive plans. In this article, we’ll evaluate the main solutions open to SMEs and help you choose the right one.

1. An Enterprise Management Incentive (EMI) scheme

An Enterprise Management Incentive (EMI) scheme is a popular way for small and medium-sized businesses (SMEs) to grant share options to employees. However, some companies carrying out ‘excluded activities’ may not be eligible. For example, those involved in banking, farming, property development, and legal or accountancy services are not permitted to use them.

EMI share schemes work by giving employees options to buy shares in the future, rather than giving them the shares straight away. Employees can usually use these options (known as “exercising” the options) after a certain period (like six months) or if the company is sold.

The company and HMRC agree on the value of the shares upfront. If the employee buys the shares later at the value that was agreed on at the start, they usually won’t have to pay Income Tax or National Insurance. If they pay less, Income Tax is only due on the difference between the agreed value and what they paid.

Any gain from the value at date of grant to the date of an eventual share sale is generally subject to Capital Gains Tax (CGT) and most shares acquired through EMI schemes meet the conditions for the beneficial 14% rate of Capital Gains Tax by virtue of Business Asset Disposal Relief (increasing to 18% from April 2026).

2. A direct share award

In the case of a direct share award, the employee receives shares outright, rather than options. However, they will have to pay Income Tax on the market value of the shares at the time they receive them. While this approach is usually less tax-efficient than an EMI option, it can still be attractive for newer businesses with a lower share value, meaning the tax cost is more manageable.

3. Issuing ‘Growth Shares’

Growth shares are shares given to employees that only start to deliver value when the company grows in the future. Because they don’t benefit from the company’s existing value, the initial value of these shares is usually quite low—although HMRC considers there to be some ‘hope value’ right from the start.

While this approach is often less financially rewarding for employees in the short term, it can be a good fit when the existing shareholders want to keep the current value of the business intact and only share in future growth.

4. Direct share award for market value but on a ‘nil paid’ basis

Under the direct share award for market value on a ‘nil paid’ basis approach, employees are issued shares at their full market value, but they only pay the nominal (face) value upfront. The remaining balance is left unpaid until they sell the shares when they have the funds to cover it.

This method helps to reduce upfront Income Tax, as the employee doesn’t need to pay a large amount right away. However, the outstanding balance remains a debt to the company, so it’s important to consider how this debt would be handled—especially if the employee leaves the company before the shares are sold.

This approach doesn’t work under an EMI scheme, which requires shares to be ‘fully paid’ at exercise, which means there isn’t technically a way of agreeing the value with HMRC upfront under this direct share award approach.

5. A ‘non-approved’ share option scheme

A ‘non-approved’ share option scheme is any scheme that isn’t run through an EMI or other HMRC-approved structure.

Under these schemes, the employee would pay Income Tax on the difference between the market value of the shares when they exercise the option and the price they paid. This makes them less tax-efficient than EMI schemes.

However, it’s possible to structure these options so they can only be exercised when the company is sold or exits. In that case, the employee pays the tax only when they have the cash proceeds from selling the shares.

How can we help?

Rickard Luckin have extensive experience in Employee Share Schemes. We can advise on the options available to your company in more detail, and recommend which route would be the most tax advantageous and would help your company achieve its commercial objectives.

We can undertake a valuation of your company to establish the tax liabilities that may arise under each of the scenarios above, and if an EMI scheme is appropriate, we can agree a valuation with HMRC.

We also have a statutory services team that can prepare the necessary statutory paperwork to implement the recommended scheme. Depending on which route is appropriate, we may also work with your solicitor to help implement the scheme.

If you would like to find out more about potential routes for your company, please do get in touch.