A share option gives you the right to buy shares in your company at a fixed price, at a point in the future. That fixed price is called the exercise price (sometimes called the strike price), and it’s usually set at or below the market value of the shares when the option is granted to you.
You don’t buy the shares straight away. Instead, you wait until certain conditions are met — typically a period of time (called a vesting period) or hitting specific performance targets. Once those conditions are met, you can exercise your options, meaning you pay the exercise price and become a shareholder.
The potential upside? If the company grows and the share value increases, you get to buy shares at the original lower price — and pocket the difference when you eventually sell.
The two types of share options in the UK
There are two main types of share options you might be granted as a UK employee:
- Unapproved options — flexible, but with limited tax benefits
- EMI options — significant tax advantages, but limited to certain companies
Let’s start with unapproved options, then cover EMI.
Unapproved share options: how they work and how they’re taxed
Unapproved options make up the majority of options offered to employees. Your exact tax liability will depend on your personal circumstances and what’s written in your option agreement.
Here’s when tax can arise across the lifecycle of an unapproved share option:
| Stage | What’s taxed? | Tax applicable |
|---|---|---|
| Grant | No tax to pay | — |
| Vesting | No tax to pay | — |
| Exercise | Difference between exercise price and current fair market value | Income Tax & Employer/Employee National Insurance |
| Sale | Gain between market value at exercise and final sale price | Capital Gains Tax |
As an employee, you generally won’t face a tax bill until you exercise your options. At that point, Income Tax and National Insurance may apply on the gain. When you eventually sell your shares, Capital Gains Tax (CGT) applies to any further increase in value.
Unapproved share options: a worked example
Let’s walk through a real-world example to show how the tax calculation works.
Tim is a UK tech employee earning £90,000 per year. When he joined his company, he was granted the option to buy 10 shares at £10 per share. His options have now vested and the shares are currently worth £20 each.
| Detail | |
|---|---|
| Exercise price per share | £10 |
| Current market value per share | £20 |
| Gain per share | £10 |
| Total taxable gain (10 shares) | £100 |
The £100 is treated as employment income, meaning Tim pays:
- Income Tax at 40% (his marginal rate) = £40
- Employee NICs at 2% = £2
- Total tax bill: £42
⚠️ Depending on your option agreement, you may also be liable for the employer NIC component, which currently stands at 15% — bringing the total potential liability to £57 in this example.
What happens when Tim sells his unapproved shares?
If Tim sells his shares immediately after exercising, no further tax is due — he’s already paid Income Tax on the gain at exercise.
However, if Tim holds onto his shares and the price increases further, Capital Gains Tax (CGT) will apply to that additional growth when he eventually sells:
- Tim’s shares were worth £20 each at exercise
- If he later sells at £30 per share, the taxable gain is £10 per share
- With 10 shares, that’s a £100 capital gain
- After deducting his annual CGT allowance of £3,000, any remaining gain is taxed at 24%
In this example Tim’s gain falls within his annual CGT allowance so no further tax would be due — but as gains grow, so does the potential tax bill.
How is tax on unapproved share options paid?
This depends on your employer and the terms of your option agreement. There are typically two approaches:
Via payroll: Your employer sells a sufficient number of your shares to cover the Income Tax and NIC liability, with the remainder transferred to you. This is sometimes called a same-day sale or sell-to-cover arrangement.
Via Self Assessment: In some cases, the responsibility falls on you as the employee. You’ll need to fund the tax bill yourself and report the income through a Self Assessment tax return with HMRC.
If you’re unsure which applies to you, check your option agreement or speak to your employer’s HR or finance team before you exercise. Any Capital Gains Tax liability will always need to be reported via Self Assessment.
EMI share options: how they work and how they’re taxed
EMI (Enterprise Management Incentive) is a UK government-recognised share option scheme designed to help smaller, growth-focused companies attract and retain talented employees. Because EMI is approved and regulated by HMRC, employees who receive EMI options benefit from significantly more favourable tax treatment — making them one of the most popular forms of equity compensation in the UK tech sector.
Who qualifies for EMI?
To qualify for EMI, both the company and the employee must meet specific eligibility criteria set by HMRC.
The company must:
- Have gross assets of no more than £30 million
- Have fewer than 250 full-time equivalent employees
- Be an independent trading company — certain industries including banking, property development, and legal services are excluded
The employee must:
- Work at least 25 hours per week (or 75% of their working time) for the company
- Hold no more than 30% of the company’s shares
What are the tax differences between EMI and unapproved options?
The key difference comes down to how much tax you pay and when. With unapproved options, Income Tax and National Insurance apply to the full difference between your exercise price and the current market value at the point you exercise. EMI options are far more tax-efficient — in most cases you will only pay Capital Gains Tax when you eventually sell your shares.
EMI share options: a worked example
Let’s use the same example to show how EMI options are taxed in comparison.
Tim is a UK tech employee earning £90,000 per year. When he joined his company, he was granted EMI options to buy 10 shares at £10 per share — the fair market value at the time of grant. His options have now vested and the shares are currently worth £20 each.
Because Tim’s exercise price matched the fair market value at grant, no Income Tax or NICs are due when he exercises. This is the key advantage of EMI — any growth in share value between grant and exercise is sheltered from Income Tax entirely.
⚠️ If your exercise price was set below the fair market value at the time of grant, an Income Tax liability would apply to that difference at the point of exercise.
When Tim eventually sells, CGT applies to the full gain between the grant date value and the final sale price:
| Detail | |
|---|---|
| Share value at grant | £10 per share |
| Sale price per share | £500 per share |
| Gain per share | £490 |
| Total capital gain (10 shares) | £4,900 |
After deducting his annual CGT allowance of £3,000, Tim has a taxable gain of £1,900. As a higher rate taxpayer this is taxed at 24%, resulting in a CGT bill of £456.
Compare this to the unapproved options example — where Income Tax and NICs applied at exercise — and the tax efficiency of EMI becomes clear.
How is tax on EMI options paid?
For most EMI option holders, the only tax due is Capital Gains Tax when you sell your shares. This is your responsibility to report and pay directly to HMRC via Self Assessment — your employer isn’t involved at this stage.
If an Income Tax charge applies at exercise because your exercise price was below the fair market value at grant, this will typically be collected through payroll in the same way as your regular salary.
Still have questions about your share options?
Understanding how your options are taxed is the first step to making the most of them. If you’re unsure about your specific situation, it’s always worth speaking to a qualified accountant or tax adviser. You can also refer to HMRC’s official guidance on employee share schemes for more detail.
This article is for informational purposes only and does not constitute financial or tax advice.