Scaling a business means finding and keeping exceptional people. When cash is tight, competing with the salaries and perks of larger companies can be a challenge. Employee share schemes (ESS) offer an alternative, giving employees a stake in the business and aligning them with its long-term success.
This guide looks at the benefits for founders, key considerations, and the most common schemes in the UK, and how our specialist team can help you structure the right plan for your business.
If you're considering implementing an employee share scheme to motivate your team and drive growth, or if you need expert advice on structuring the right scheme for your business, our experienced employee share scheme solicitors are here to help.
Contents:
Why set up an employee share scheme?
An ESS can do far more than help with recruitment. For many founders, it is a way of attracting top talent without stretching salary budgets, particularly in start-ups and scale-ups where cash is limited. Studies consistently show a link between employee share ownership and improved company performance, as those with equity are more motivated to see the business succeed.
HMRC’s latest figures show a record 20,370 UK companies operated a tax-advantaged scheme in 2023/24, with EMI the most popular choice for 89% of them. Employees received £1.29 billion in combined Income Tax and National Insurance relief, up 18% on the previous year, while SAYE overtook EMI for total tax relief for the first time.
Equity can also improve retention. Employees who own a stake in the company are more likely to stay for the long term to realise the benefits of their awards, reducing turnover and preserving valuable skills and knowledge. It also encourages alignment, as employees and shareholders share the same goal of increasing the value of the business. Over time, this can foster a culture of trust, shared purpose and stronger teamwork.
Benefits for employees
From the employee’s perspective, ESS can provide a clear financial incentive if the company grows in value. Many schemes also offer favourable tax treatment, which can increase the net benefit compared to a cash bonus. Beyond the financial aspect, owning shares can give employees a stronger sense of buy-in to the business and shared purpose..
Risks and how to manage them
While the benefits of ESS can be significant, they require careful planning. There are costs associated with setting up and maintaining a scheme, along with ongoing compliance requirements. Without proper compliance , employees might give up cash salary for shares that ultimately do notdeliver the expected benefits.
These risks can be mitigated through clear communication, compliant valuations, and legal advice throughout the life of the scheme. With the right framework in place, an ESS can be a strong motivator while protecting both the company and the employees.
For complete peace of mind, we offer expert legal support and ongoing share plan management through our easy-to-use online platform.
Choosing the right scheme
There are several different employee share schemes available in the UK. The right choice will depend on your company’s stage, growth plans, and whether you want the scheme to apply to all staff or to selected key individuals.
| Scheme | Best for | Key benefits | Main limitations | Tax advantages | Complexity | Time to implement |
| EMI | Start-ups and growth companies with no more than £30m gross assets, fewer than 250 employees | Flexible, highly tax efficient, can be used for key employees or all employees | Eligibility rules | No income tax or NICs on exercise, potential CGT at 14% increasing to 18% in April 2026 | Medium | 6 to 8 weeks |
| CSOP | Established SMEs and large companies | good retention tool | £60k individual limit | No income tax or NICs on exercise | Medium | 6 to 8 weeks |
| SIP | Broad employee ownership | Multiple award types, Vehicle to reward existing value tax-efficiently rather than future growth | Low financial cap(£9,000 annual award limit) | Income tax and CGT relief | High | 8 to 12 weeks |
| SAYE | Encouraging saving and loyalty | Employee funded, all employee | Savings period before exercise | Tax free gains | High | 8 to 12 weeks |
| Growth or hurdle shares | Rising valuations | Low entry cost for staff | Complex structuring | CGT on gain | Medium high | 6 to 8 weeks |
| Share subscriptions | Early stage with low share value | Simple structure | Value rises can restrict access without tax charges | CGT on gain | Low Medium | 4 to 8 weeks including valuation time |
| Phantom shares | Not prepared to issue equity | No dilution, flexible | Taxed as income | None | Low | 2 to 4 weeks |
| Joint share ownership | Retaining simple constitutional documents and can survive an IPO | Tailored rights and upside delivered tax-efficiently | Legal complexity | CGT on gain | High | 8 to 12 weeks |
Generally, EMI options are considered the most attractive choice for start-ups. They offer a high degree of flexibility, allowing awards to be tailored to specific individuals. They are also highly tax efficient, with no income tax or National Insurance contributions on exercise and the potential for capital gains tax at 14-18%. In addition, they can be designed to reward performance and loyalty, making them a powerful tool for retaining and motivating key talent while keeping costs manageable.
For more established companies that do not qualify for EMI and expect to grow strongly, growth shares are often a successful alternative, offering the potential for significant gains while managing upfront costs for employees.
For answers to your most pressing questions about EMI share option schemes, from eligibility criteria to tax implications, check out our comprehensive EMI FAQs.
To learn more about how growth shares work and whether they could be the right fit for your business, explore our growth shares FAQs.
Next steps for founders
If you are considering an ESS, start by defining your objectives, whether that is recruitment, retention, rewarding performance or a combination of all three. Check whether your business meets the eligibility requirements for certain tax-advantaged schemes, as this may influence your decision. It is also important to model how the scheme will affect your cap table, especially if you are planning future funding rounds.
Legal advice is essential to ensure the scheme is set up correctly and to avoid unexpected tax consequences. Finally, make sure the scheme is clearly explained to your team. Equity can be a powerful motivator, but only if employees understand how it works and what it could mean for them.
We can help
Our specialist team can advise on the best structure for your company, ensure compliance with HMRC requirements and prepare the legal documents needed to launch successfully.
If you are considering introducing a share scheme and want a step-by-step guide to getting it right from the outset, look at our in-depth article on how to set up and operate an employee share scheme. It covers everything from choosing the right type of scheme to meeting legal requirements, so you can launch with confidence and ensure it runs smoothly.
The best of both worlds: expert legal support, easy online access
We provide ongoing support for your employee share schemes through our easy-to-use online platform, managing your share plans end-to-end, offering 24/7 access, clear cap table visibility, simplified reporting, and expert legal support — all for just £115 a month.
