Your guide to employee share schemes and options in the UK 

Offering your team a slice of your business via an employee share scheme (ESS) is one of the best ways to remind them that you’re all in it together. 

But startup founders may feel overwhelmed by the process of setting this up: the HMRC forms, business valuations, and legal small print. Don’t worry, you don’t need to be a financial or legal expert to offer an employee share scheme in the UK — it’s less complicated than it sounds.

There are many well–trodden employee share scheme routes for all sorts of businesses. We’ll walk you through what they are, how they work, and which one might suit you.

Key takeaways:

• An employee share scheme lets staff own a stake in your company, either by being given shares or being granted the option to buy them later
• The UK has four HMRC–approved schemes — CSOP, EMI, SIP, and SAYE — plus unapproved schemes you can design yourself
• Approved schemes come with generous tax perks for you and your employees; unapproved ones give you more flexibility but fewer tax breaks
• The right choice depends on your company’s size, stage, and what you’re trying to achieve — retention, growth, or both

An employee share scheme, sometimes shortened to ESS, is any arrangement where a company gives its employees a stake in the business, usually through shares or the right to buy them. 

That stake grows in value alongside the company your employees are helping to build. Instead of (or alongside) a salary bump, you’re offering ownership and a reason to stick around for the journey.

There are two main routes to know about:

• Share awards: where employees are given shares directly, often for free or at a discount, with no strings attached beyond a holding period

What is a holding period? This is a set timeframe during which an employee must keep their shares locked away, without selling, transferring, or withdrawing them

• Share options: where employees are given the option to buy shares at a fixed price at some point in the future, usually once certain conditions (like a length of service or a company milestone) are met 

Share options are what people refer to when they talk about an employee share option scheme.

Options are especially popular with startup companies. This is because they let your team benefit from future growth without you having to let go of too much company equity early on.

This is the main fork in the road for employee share schemes. 

HMRC–approved schemes are specific frameworks set up by the government.  Follow HMRC’s rules, and your employees can access valuable tax advantages, such as paying capital gains tax on the shares instead of income tax, which is usually charged at a much lower rate. 

Tip: Not sure how capital gains tax works? Check out our what is capital gains tax? guide to find out what it means for you and your business.

There are four of these approved schemes in the UK: CSOP, EMI, SIP and SAYE. We’ll cover each below.

Unapproved schemes are ones you design yourself, without needing to fit HMRC’s criteria.

These are generally far more flexible. For example, you can set whatever terms suit your business. But your employees will usually pay income tax and National Insurance on the value they receive, which makes them less tax–efficient overall.

Before we start getting into those four acronyms, one distinction is worth highlighting: an option isn’t a share yet. 

Granting someone an option gives them the right to buy shares later, at a price that is fixed today. They only become a shareholder once they exercise that option and hand over the exercise price. 

Exercising simply means using that right — paying the agreed price to buy the shares. 

With that groundwork laid, here’s how the main routes compare. 

What it is: any employee or director can be given the right to buy shares in the future, at a price fixed today. You can grant options over shares worth up to £60,000 per person (based on today’s value).

Why founders use it: there’s no limit on how big your company can grow, so CSOP is a good option if you’ve outgrown EMI — or if your business is in an industry EMI doesn’t cover, like banking or accountancy.

How the tax works: if employees hold onto their options for at least three years before using them to buy shares, they won’t pay any income tax or National Insurance. They’ll only pay capital gains tax later, when they sell the shares at a profit.

Risks: options have to be offered at the share price on the day you grant them, so this only pays off for your team if the company grows in value over time.

Example: imagine you grant a senior software architect options over 5,000 shares at today’s value of £2 each. Four years later, the company has grown, and shares are now worth £5. They exercise their options — paying £10,000 for shares now worth £25,000. That £15,000 gain is free from income tax and NI. They only pay capital gains tax when they eventually sell.

What it is: the gold standard share scheme for UK startups and scale–ups. It’s designed to help smaller, fast–growing companies attract and keep good people, even when they can’t afford big salaries.

Why founders use it: it offers the most generous tax perks in the UK, and you choose who gets options and on what terms. You can even set the price to buy shares as low as 1p or 10p (known as a nominal price), giving your earliest hires the chance at a much bigger payout later.

How the tax works: as long as the price is set fairly based on what the company is worth at the time, employees pay no income tax or National Insurance — either when they’re given the options or when they use them to buy shares.

Tip: It’s worth checking with your financial adviser that your nominal price reflects how little the company is worth at this early stage — the shares only stay tax–free if it does. When employees eventually sell their shares, they pay capital gains tax, often at a lower rate if they qualify for a relief called Business Asset Disposal Relief (currently 18%, up from 14%).

Risks: your business needs to be independent, worth less than £30 million in total assets (broadly, everything the company owns), have fewer than 250 full-time staff, and keep the total value of unused options across the company under £3 million. You must also tell HMRC within 92 days of granting the options — miss the deadline, and you risk losing the tax benefits. 

Example: you grant a lead designer 2,000 options at a nominal 10p exercise price. By the time the company reaches an exit, the shares are worth £5 each. The employee pays just £200 to buy £10,000 worth of shares — a £9,800 gain, none of which is taxed as income.

What it is: a scheme where employees are given real shares straight away, rather than the option to buy them later. If you offer a SIP, it has to be open to your entire team on the same terms.

How it works: there are three ways to do this. Give staff free shares (up to £3,600 a year), let them buy shares out of their pay before tax is taken (up to £1,800 a year, or 10% of their salary if that’s lower), or match the shares they buy — here, you can offer up to two free shares for every one they purchase.

Why founders use it: it creates a ‘We’re all in this together’ feeling straight away, because staff become real shareholders from the start.

How the tax works: the shares are held safely in a special UK trust set up for the scheme. If employees leave their shares in the trust for 5 years, they pay zero income tax, National Insurance, and capital gains tax when selling straight from the scheme.

Risks: setting up and running the required trust adds ongoing legal costs and admin work for your company.

Example: an employee receives £3,600 in free shares and buys £1,800 in partnership shares. You match those partnership shares one-for-one, giving them a £7,200 stake in year one. If they leave the shares in the trust for 5 years, they pay £0 in income tax or National Insurance on the whole package.

What it is: this scheme is also known as Sharesave, and it’s a risk–free savings plan for your whole team.

How it works: employees choose to save a fixed amount — between £5 and £500 a month — straight from their salary, over 3 or 5 years. At the end of this period, they can use this savings pot to buy shares or take it back as cash. The price to buy company shares is locked in at the start, often at up to a 20% discount.

Why founders use it: it carries zero financial risk for your employees. If your share price has gone up by the end of the savings period, staff use their savings to buy discounted shares. If it’s gone down, they simply take their cash back in full.

How the tax works: the savings, any interest earned, and the discount on the share price are all completely free of income tax and National Insurance.

Risks: this works best for established, mid–sized businesses with steady payroll and a predictable share price — it’s harder to run for early-stage startups.

Example: an employee saves £250 a month for three years, building up a £9,000 pot. The purchase price was locked in at £3.20 (a 20% discount on the original £4 price). They use their £9,000 to buy shares now worth £11,250 — an instant £2,250 gain, completely free of income tax and NI.

If none of the above quite fit — maybe your company doesn’t meet the criteria, or you want more control over the terms — you can set up your own unapproved scheme instead.

You decide who’s eligible, what they need to do before they can buy shares (called vesting conditions), and what price they’ll pay — there’s no need for HMRC to sign off on any of it. Once those conditions are met, employees pay the agreed price to become shareholders, just like with the approved schemes. The difference is in how it’s taxed.

Key benefits:

• Complete flexibility over terms, eligibility, and pricing
• No size, sector, or structural restrictions to meet
• Useful for rewarding specific hires with bespoke arrangements

Risks and limitations:

• Significantly less tax-efficient than any of the approved schemes
• No voting rights until options are exercised, as with any option
• Tax bills at exercise can catch employees off guard if not clearly explained upfront

When it comes to tax, employees usually pay income tax and National Insurance when they exercise their options — on the difference between what they paid and what the shares are actually worth at that point. Capital gains tax applies again if they later sell at a profit. 

For most growing businesses, yes. But there are a few caveats, which we’ll get to.

Generally, share schemes:

• Offer a good way to attract talent you couldn’t otherwise afford based on salary alone
• Align your team’s interests with the company’s long–term success in a way that a one–off bonus could not
• Improve retention — not many people want to walk away from unvested options right before they’re due to pay out

For employees, share schemes offer the chance to benefit from the company growth they’re helping to create. This often comes with meaningful tax advantages if the scheme is HMRC–approved. 

Now the caveats: 

• Shares (and options) are much riskier than cash. This is because their value depends on the company doing well, and private company shares can be hard to sell before an exit event
• On your side as a founder, the main costs are time and admin. Valuations, HMRC registration, annual reporting, and plan documentation all take effort, particularly for the approved schemes

Tip: it’s worth being upfront with your team about what being a shareholder means in practice. To help, our guide on what is a shareholder? is a good one to point new option–holders towards.

There’s no right or simple answer here. It really comes down to your size, stage, and what you’re trying to achieve. 

As a rough guide:

Whatever route you choose, it’s a good idea to chat to an accountant or share scheme specialist before you commit — the rules are detailed, and getting the setup right from the get–go saves a lot of time later.

Employee share schemes aren’t just for big companies. They’re accessible to small, ambitious teams too, and are often more affordable than the salary increases you might otherwise be weighing up. 

Whichever scheme you land on, the goal is the same: giving the people who help build your business a stake in where it’s headed.

If you’re in the early stages of setting up your business, our company registration can get you incorporated in under 24 hours. Once registered, opening a dedicated business current account makes it much easier to keep your day–to–day finances (and eventually, your share scheme admin) organised from the start.

For more startup advice, explore our resource hub for guides on everything from financial planning to company growth. 

They’re closely related, but ESOP (Employee Stock Ownership Plan) is a US term, referring to a specific type of retirement–linked scheme used by American employers. In the UK, we tend to talk about an employee share scheme (ESS) or employee share option scheme instead — the umbrella terms covering CSOP, EMI, SIP, SAYE, and unapproved arrangements.

Not exactly, but they can be very tax–efficient. With HMRC–approved schemes like EMI, CSOP, SIP, and SAYE, employees can avoid income tax and National Insurance if they meet the scheme’s conditions. Though capital gains tax usually applies when the shares are eventually sold at a profit. Unapproved schemes don’t offer the same protection, so income tax and NI are more likely to apply.

The main downsides are admin (valuations, HMRC reporting, and paperwork all take time), risk for employees (share values can fall as easily as they rise), and limited liquidity (private company shares can be hard to sell before an exit event). None of these are dealbreakers — but they’re worth planning for from the start.