EMI schemes are often seen as the go to choice for rewarding employees in growing businesses. While they can be a great fit, they’re not always the right solution. If your company has overseas hires, contractors, a complex group structure or has grown beyond EMI’s limits, it’s worth exploring other options that might better suit your needs.
This guide gives you a board ready way to compare EMI with growth shares, CSOP and cash settled alternatives, so you can reward the right people and stay due diligence ready. This will be particularly useful for anyone involved in scaling a company and preparing for investment or an exit.
Our specialist EMI scheme solicitors can help you set up and manage EMI, CSOP, growth share and phantom plans for your scaling business.
Contents:
- Snapshot: the main routes to incentivise with equity
- EMI in practice - what founders like about it (and why)
- How EMI runs, in plain English
- When EMI is a strong fit
- EMI blockers and edge cases to watch
- Growth shares - what they are and when to use them
- CSOP briefly - who benefits and why it’s back on the table
- Non‑approved options/JSOP/SARs/phantom plans - where they make sense
- EMI vs growth shares vs CSOP (plus nonapproved/phantom): side-by-side
- Decision criteria: how to choose the right route for your business
- Funding and exit implications
- Short, anonymised case snapshots
- Ready to implement an employee share scheme?
Snapshot: the main routes to incentivise with equity
You might be here because one or more of these situations has come up: a new funding round with investors asking about your option pool, a senior hire joining soon, signs of retention issues in a key team, plans for an exit in the next few years, or a team that includes contractors or international staff.
These moments often raise an important question – which incentive plan fits your people, structure and growth plans, and will still stand up under due diligence?
EMI (Enterprise Management Incentives) are UK tax-advantaged options for qualifying growth companies that meet certain size and trade criteria. They offer flexible vesting and exercise terms and can deliver strong tax outcomes if designed and operated correctly. You can find out more about EMI in our EMI FAQs.
Growth shares, also known as hurdle shares, are a new class of shares that only participate once a set hurdle is reached. They are flexible in design and often useful where EMI is not suitable or for non-employees. Tax is generally applied mainly to capital growth if structured properly. We’ve created a useful guide to growth shares if you want to learn more.
CSOP (Company Share Option Plan) offers HMRC tax advantaged options for a broader range of companies than EMI. Since April 2023, the individual limit has increased to £60,000 and previous share class restrictions have been removed, making CSOP viable again for scale up businesses. You can read more about setting up CSOP in our article.
Unapproved options, JSOPs or SARs are useful for people outside the tax advantaged regimes, such as non-executive directors, certain contractors, or when a company’s size or structure prevents EMI eligibility. JSOPs typically target capital growth above a hurdle, while SARs and phantom plans pay cash based on share value. Cash settled awards are subject to income tax and PAYE.
Phantom or cash settled plans mimic options without issuing equity. They keep the cap table clean, are fully taxable as a cash bonus when paid, and create a profit and loss liability that needs to be measured each period. Our phantom shares FAQs discuss them in more detail.
EMI in practice - what founders like about it (and why)
If you qualify, EMI typically delivers:
- Headline tax efficiency - no income tax/NIC if options are granted at market value and no disqualifying event occurs; gains taxed under CGT on sale, with Business Asset Disposal Relief (BADR) potentially available after a 24‑month holding period from grant (rate now 14% for disposals from 6 April 2025; 18% from 6 April 2026).
- Corporation tax relief - the company gets a CT deduction broadly equal to the “spread” at exercise.
- Flexibility and alignment - you can set commercially sensible vesting, performance conditions and leaver terms and still keep a clean cap table until exercise.
Want to know if you’re eligible for EMI? You can read more about whether you qualify for EMI in our article.
How EMI runs, in plain English
- Valuation: agree the market value with HMRC’s Shares & Assets Valuation (validity typically 90 days).
- Plan rules & grant: board and shareholder approvals, option agreements (no longer need to include share restriction details or collect a working time declaration at grant for options from 6 April 2023).
- Notify HMRC: for grants on/after 6 April 2024, notify by 6 July following the end of the tax year of grant (watch for legacy plan rules that still say “92 days”).
- Vesting & exercise: employees exercise on exit or time-based; company gets its CT deduction then.
- Annual ERS return: file by 6 July each year.
If you’re thinking about how long it takes to set up an EMI scheme, read our ask the expert guide.
When EMI is a strong fit
EMI tends to be the right answer when you:
- Have a UK permanent establishment, carry on a qualifying trade and meet size limits (gross assets ≤ £30m and <250 FTEs at grant).
- Are rewarding UK employees (including full‑time directors) who work 25 hours a week or 75% of their working time for the group.
- Expect a sale in 2–5 years, want exit-based vesting, and need investor friendly, due diligence clean paperwork.
EMI blockers and edge cases to watch
- Ineligible participants: non-executive directors and contractors cannot receive EMI options, though directors who are genuine employees can.
- Working time test: if someone works less than 25 hours per week or 75% of their time (with only limited statutory exceptions), they do not qualify for EMI.
- Material interest cap: anyone holding 30 per cent or more of the company, alone or with associates, is generally ineligible for new EMI options.
- Company level requirements: the company must be independent, and certain trades or group structures can make it ineligible.
- Administrative pitfalls: missing notification or annual return deadlines can invalidate the tax relief or trigger penalties, so it is important to track key dates such as 6 July.
- Some issues can also arise with EMI during a business exit, which we discuss in this guide.
If EMI is not an option for any of these reasons, below are some credible alternatives to explore.
Growth shares - what they are and when to use them
Growth shares are a new class of shares that only participate once a set valuation is reached. Employees, and in some cases certain non-employees, can subscribe at a low upfront cost. If structured correctly, any future value above the hurdle is usually subject to capital gains tax rather than income tax. Setting them up requires governance changes, such as updates to articles or class rights, and you can decide whether they receive dividends.
Where they shine
- You are ineligible for EMI or have reached someone’s EMI limit.
- You need to include specific contributors that EMI cannot cover, such as advisers or non-executive directors, noting that employment related securities rules may still apply and tax outcomes can vary.
- You want strong behavioural alignment with a higher performance bar, while keeping control dilution tightly managed.
CSOP briefly - who benefits and why it’s back on the table
CSOP is a tax-advantaged option plan for companies that do not qualify for EMI or have grown beyond its limits. Since 6 April 2023, the per-person limit has increased to £60,000 and the previous restriction on “worth having” share classes has been removed.
Participants must be employees or full-time directors. Options granted at market value and exercised at least three years later are usually free of income tax and National Insurance, with gains taxed under capital gains rules on sale. Company independence rules still apply, with some exceptions for listed group control.
Where it shines
- You have grown beyond EMI eligibility but still want tax-advantaged options.
- You need to offer options to full time directors or employees that do not qualify for EMI.
- You want to deliver long term incentive aligned with capital growth, with gains taxed under capital gains rather than income tax.
Non‑approved options/JSOP/SARs/phantom plans - where they make sense
Unapproved options are flexible and quick to set up, making them useful for senior hires or situations where tax-advantaged plans do not fit. Income tax and National Insurance apply on exercise, while the company usually receives a corporation tax deduction for the taxed amount.
JSOPs (Joint Share Ownership Plans) allow employees to co-own shares, often via an employee benefit trust, and benefit from growth above a set hurdle. They can deliver capital gains tax outcomes but are structurally complex and require careful handling, particularly following the Vermilion decision.
SARs and phantom plans are cash settled, so no equity is issued. They are taxed as earnings on payout and create an accounting liability that must be remeasured to settlement.
Where they shine
- You need flexibility for senior hires or contributors outside EMI or CSOP rules.
- You want to align employee rewards with capital growth while keeping tax outcomes efficient.
- You want to incentivise people without diluting the cap table or issuing new equity.
EMI vs growth shares vs CSOP (plus nonapproved/phantom): side-by-side
| Route | Who & eligibility | Tax/relief | Governance & admin | Dilution & dividends | Notes |
| EMI | UK employees incl. full-time directors (not NEDs/contractors); company ≤£30m assets, <250 FTE, qualifying trade; employee ≥25h/75%, <30% interest | Usually CGT on sale; BADR 14% from Apr 2025; CT deduction for company | Plan rules, grant docs, HMRC valuation, notify 6 July, annual ERS return | Dilution only on exercise; no dividends pre-exit | Very high investor acceptance; UK only |
| Growth shares | Employees and, with advice, select others; no statutory limits, new class & hurdle | CGT on growth; depends on structure | Amend articles; board/shareholder approvals | Managed via class rights; dividends if rights allow | Flexible for non-EMI cases; can extend internationally with local advice |
| CSOP | Employees / full-time directors; per person limit £60k; independence test | No income tax/NIC if exercised ≥3 yrs after grant at MV; CGT on sale; CT relief usually available | Notify scheme; ERS returns; follow valuation best practice | Dilution on exercise; no dividends pre-exercise | Post-2023 reforms make it viable for scale ups |
| Unapproved options | Anyone you choose, incl. NEDs/contractors; few legal constraints | Income tax/NIC on exercise; CGT on later sale; CT deduction for company | Light governance; ERS reporting | Dilution on exercise; no dividends | Fast and flexible; global use possible with local tax |
| SARs / Phantom | Employees and directors; contractual, no shares issued | Taxed as earnings on payout; NIC applies; company deduction for cash | Simple docs; payroll handling; no ERS return | No dilution; no dividends | Keeps cap table clean; global use possible |
Decision criteria: how to choose the right route for your business
If you are…
- UK employee heavy, simple ownership, exit in sight: Start with EMI; use growth shares for special cases or where EMI headroom is maxed; keep CSOP as a backup if you fail EMI company tests.
- Contractor/NED/international mix or complex group: Growth shares (with ERS aware structuring) or unapproved options/SARs/phantom will likely be cleaner than forcing EMI to fit.
- Outgrown EMI (size/structure) but want tax-advantaged options: CSOP is “back” post 2023 reforms.
- Cash-rich, equity tight: Phantom/SARs deliver value without dilution; budget the cash impact and accounting liability.
Funding and exit implications
Investors and buyers focus closely on the basics. They expect clean plan rules and grant documentation, clear vesting and leaver mechanics, well thought through acceleration, accurate cap table modelling, and evidence that reporting has been done on time, such as HMRC option notifications and ERS returns by 6 July. Disqualifying events or missing filings elections for restricted shares can cause last minute friction.
When it comes to tax at exit, EMI gains are normally subject to capital gains tax, with BADR potentially available after 24 months from grant (14% from 6 April 2025; 18% from 6 April 2026).
CSOP gains are also usually taxed as capital gains if the three-year condition is met. Cash settled plans are taxed as earnings on payout. Make sure your heads of terms reflect exercise mechanics and withholding requirements.
Short, anonymised case snapshots
- UK employee heavy SaaS (Series A): Adopted EMI with exit-based vesting and a clear leaver policy. Offer letters became stronger; investors praised the clean paperwork.
- Agency with contractor bench: Implemented growth shares for core employees and a phantom bonus for contractors; kept cap table clean and aligned rewards to gross margin.
- Fintech with US parent (EMI ineligible): Rolled out CSOP for UK staff post reforms and unapproved options for a few senior hires; avoided complex group restructuring.
Ready to implement an employee share scheme?
Our specialist employee share scheme solicitors can help you choose the right scheme for your company, ensure compliance with HMRC requirements, and prepare the legal documents you need to launch smoothly.
If you are thinking about introducing a share scheme and want to learn more, our in-depth guide on what employee share schemes are takes you step by step through the process from selecting the right type of plan to meeting legal and reporting obligations. It will help you set up your scheme correctly from the start, stay investment ready, and make sure it runs effectively for your team and future funding rounds.
