How do employee share schemes work for tax?
Answered 17 March 2026
Here is a comprehensive overview of how employee share schemes work for tax in the UK.
How Employee Share Schemes Work for Tax
What the law says
The primary legislative framework is Part 7 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), which contains special Income Tax rules for cases where securities or securities options are acquired in connection with an employment. Specific tax-advantaged schemes are governed by:
- Schedule 2 ITEPA 2003 – Share Incentive Plans (SIPs)
- Schedule 3 ITEPA 2003 (s.519) – SAYE schemes
- Schedule 4 ITEPA 2003 (s.524) – Company Share Option Plans (CSOPs)
- s.530 ITEPA 2003 – Enterprise Management Incentives (EMI)
Where shares are simply given to an employee (or acquired at below market value), a charge to Income Tax may arise under Part 2 or Part 7 ITEPA 2003. If the shares are readily convertible assets, the employer must operate PAYE under Part 11 Chapter 4 ITEPA 2003.
For CSOP options exercised within the rules and time limits, s.524 ITEPA 2003 prevents an Income Tax charge on exercise. For EMI options, s.529 ITEPA 2003 can similarly disapply the charge under s.476 (charge on exercise).
The Capital Gains Tax Act 1992 (TCGA 1992) is modified to take into account the Income Tax treatment of employment-related securities.
HMRC guidance / practice
Overview of scheme types
There are broadly two categories of scheme:
- Tax-advantaged (approved) schemes – set up to comply with specific statutory requirements to secure beneficial tax treatment. There are four types:
- EMI – Enterprise Management Incentives (intended for small, higher-risk companies to recruit and retain skilled employees)
- CSOP – Company Share Option Plans (discretionary/executive)
- SIP – Share Incentive Plans (all-employee; can include free shares, partnership shares, matching shares, and dividend shares)
- SAYE – Save As You Earn (all-employee savings-linked share options)
- Unapproved (non-tax-advantaged) schemes – do not comply with the statutory requirements and therefore do not benefit from the same tax reliefs.
How tax arises
- Shares given or acquired at undervalue: The employee may face an Income Tax charge on the discount (market value less amount paid). For example, if an employee receives 1,000 shares worth £10 each for free, the £10,000 is chargeable as employment income and the employer must operate PAYE.
- Share options (unapproved): A charge typically arises on exercise of the option — the difference between the market value of shares acquired and the exercise price is treated as employment income.
- Tax-advantaged schemes: Employees and directors who receive shares or options under approved schemes may not be liable to certain Income Tax charges that would otherwise arise. For instance, there is generally no Income Tax charge on exercise of a CSOP option if exercised within the rules.
Capital Gains Tax
- On a later disposal of shares, CGT may arise. The CGT acquisition cost for shares from an unapproved scheme includes both the price paid and any amount already charged to Income Tax.
- For tax-advantaged schemes, because there is no (or reduced) Income Tax charge on exercise, the CGT base cost is typically just the amount actually paid for the option and the shares — resulting in a higher potential CGT gain but no double taxation.
Phantom share schemes
Some employers use "phantom" share schemes where no actual shares are transferred. The employee receives a cash payment linked to the value of shares at a future date. There is no tax charge at the time of the initial award (as no money or money's worth is received), but the cash payment is taxable as earnings under s.62 ITEPA 2003 in the year it is received.
Registration and self-certification
Since April 2014, HMRC no longer pre-approves new tax-advantaged schemes. Companies must self-certify CSOP, SAYE, and SIP schemes and register with HMRC by 6 July following the end of the tax year. EMI options must be notified to HMRC by 6 July following the end of the tax year in which the grant was made.
Citation sources
The Capital Gains Tax consequences for the employee will depend on whether the option is exercised by the employee assigned or released not exercised and lapses. The capital gains treatment of the employee is in most respects the same as for options granted under an unapproved scheme, see CG56384. However, the Income Tax treatment of options granted under a CSOP will usually lead to shares acquired on the exercise of a CSOP option having a lower acquisition cost for Capital Gains Tax purposes th
The Employment Related Securities Manual (ERSM) contains full guidance about schemes that involve the actual transfer of shares to employees. However, some employers set up incentive schemes that involve the award of ‘phantom’ or hypothetical shares. In schemes of this type, the employee is given an award which represents a specified number of units, or shares, in the employer’s company. At the time of the initial award the employee does not receive money, or any form of ‘money’s worth’. There i
The Capital Gains Tax consequences for the employee will depend on whether the option is exercised by the employee assigned or released not exercised and lapses. The capital gains treatment of the employee is in most respects the same as for options granted under an unapproved scheme, see CG56384. However, the Income Tax treatment of EMI options will usually lead to shares acquired on the exercise of an EMI option having a lower acquisition cost for Capital Gains Tax purposes than shares acquire
The employer is the UK subsidiary of a multinational company based in the USA, whose shares are listed on NASDAQ (the North American Securities and Derivatives Exchange). On 30 June 2003 an employee of the UK subsidiary is given 1,000 shares in the US parent company. The quoted value of those shares on 30 June 2003 is £10 per share. There are no restrictions on sale of the shares. ### Is the employer required to operate PAYE on the shares? The employee has received shares worth £10,000 (1,000 x
The concept of tax advantaged share schemes originated in FA 1978 with the introduction of approved profit sharing schemes (APSS, since abolished). In FA 1980 the Savings Related Share Option Scheme was introduced. Sometimes known as Sharesave (or SAYE), it is an all-employee share option scheme that links regular savings with share options. Discretionary share option schemes were introduced by FA 1984. They are now referred to in the legislation as CSOP schemes (previously known as company shar
Certain employee share schemes may be approved by HMRC under specific statutory provisions. At the time of writing there are three types of approved share schemes and also the Enterprise Management Incentives. With all four, employees and directors who receive shares or share options under their provisions may not be liable to certain of the Income Tax charges under employment income that would otherwise arise. They are sometimes referred to as tax advantaged schemes. The Capital Gains Tax posit
An employee who acquires shares in connection with his or her employment either free, or in return for a payment that is less than the value of the shares at the time of acquisition, may be chargeable to tax under Part 2 or Part 7 ITEPA 2003. For details of the amounts that count as employment income in respect of share awards see the /manual/employment-related-securities and Employee Tax Advantaged Share Scheme User Manual - HMRC If a tax charge arises on an award of shares, or when shares are
The same principles apply for calculating the amount on which PAYE must be operated where PAYE income of an employee is provided in the form of: the enhancement by the employer of an asset that the employee already owns (see EIM11860), or an event occurring before 1 September 2003 or in respect of conditional shares acquired before 16 April 2003 giving rise to a charge under Section 427 ITEPA 2003 (conditional shares, see EIM11865) an event occurring on or after 1 September 2003 giving rise to a
There are four types of tax advantaged share scheme [TASS]: CSOP. Company Share Option Plans. SAYE. Save as You Earn schemes are savings related share option schemes. SIP. Share Incentive Plans provide free shares, partnership shares, matching shares and dividend shares. EMI. Enterprise Management Incentives are unapproved share option schemes. SAV provide a valuation checking service for companies who wish to obtain assurance on the market value before options are granted. Before the introduct
This example illustrates the difference an election can make. On 30.11.11 an employee acquires 2400 shares under a CSOP and 1000 shares under an unapproved share option scheme. The employee actually pays £6 for each share. The market value of the shares at 30.11.11 is £12 per share. For Capital Gains Tax purposes the cost of the unapproved shares is the price paid together with the amount which counts as income, which in this case is the difference between the price paid and the market value (£1
There are different rules relating to tax-advantaged share schemes: Schedule 3 SAYE schemes (ITEPA03/S519), Schedule 4 CSOP schemes (ITEPA03/S524) and Enterprise Management Incentives (EMI) (ITEPA03/S530). (ERSM300000)