EMI vs CSOP vs Unapproved Options | Share Scheme Guide

EMI vs CSOP vs unapproved share options: understand the key tax differences, eligibility rules, and practical pros and cons for UK companies. Learn which share scheme best fits your business, employees, and growth plans.

EMI vs CSOP vs Unapproved Options: Which Share Scheme Fits Your Growing Company?

Choosing between EMI vs CSOP vs unapproved options is one of the most commercially significant decisions a growing UK company can make. Get it right and you have a powerful tool for attracting and retaining the talent that drives your business forward. Get it wrong, or implement nothing at all, and you risk unexpected tax liabilities and a more complicated funding round. You also risk losing key people to competitors who can offer equity packages your structure simply cannot match. This article explains the practical differences between EMI, CSOP, and unapproved share options as part of our wider work on employee share schemes, to help you work out which approach makes sense for your company.

Why This Decision Matters More Than Most Founders Expect

Equity is often the most compelling part of a package a growing business can offer. A meaningful stake in something valuable is something a large corporate simply cannot replicate, however competitive their salary. But if you structure a share option scheme poorly, or choose it without considering eligibility and tax treatment, you undermine that appeal entirely.

The three main structures available to UK companies are the Enterprise Management Incentive (EMI) scheme, the Company Share Option Plan (CSOP), and unapproved (non-tax-advantaged) options – not variations on the same theme. They sit in different parts of the tax landscape, serve different types of business, and produce very different outcomes for your employees when they eventually realise value. The choice between them affects:

• How much tax your employees pay on exercise and on a subsequent sale
• Whether the company carries an employer National Insurance liability on exercise
• How your option pool is perceived by investors at due diligence

Eligibility constraints also mean the decision is sometimes partly made for you. Many companies assume they qualify for EMI when they do not, or never consider CSOP because they have not looked at what the 2023 reforms changed. Getting a clear picture of your options early – ideally before a funding round or key hire – is where specialist advice makes a tangible difference.

EMI: The Most Tax-Efficient Structure for Qualifying Companies

The Enterprise Management Incentive scheme has dominated HMRC‑approved employee share schemes in the UK since its introduction in 2000. If your company qualifies, you usually get the most tax‑efficient results by choosing EMI, and for most qualifying businesses it should be the first structure you look at.

If you’re new to EMI, our article on what EMI option schemes are and how they work goes through the fundamentals in more detail.

Under EMI, a company can grant options over shares worth up to £250,000 per employee, measured by market value at the date of grant, subject to a company-wide limit of £3 million in unexercised options at any one time. Options are typically granted at a market value agreed with HMRC in advance. Where the exercise price equals that agreed market value at grant:

• there is no income tax charge on exercise
• there is no National Insurance – for the employee or the employer – on exercise
• when the employee later sells their shares, any gain is subject to Capital Gains Tax rather than income tax

Employees who have held qualifying EMI options for at least two years from grant may also qualify for Business Asset Disposal Relief on a subsequent disposal, which can reduce the CGT rate on qualifying gains significantly below the rates that would otherwise apply. BADR rates and conditions are subject to change and must be verified at the time of any planning exercise – the rate has been legislated to increase in stages and should not be assumed to remain at any particular level.

From the company’s side, there is no employer NIC on exercise where the agreed market value procedure has been followed correctly. A corporation tax deduction may be available in the accounting period in which options are exercised. Once properly established, the scheme is also straightforward to administer.

On notification: for options granted before 6 April 2024, the company had to notify HMRC within 92 days of grant. For options granted on or after that date, the deadline is 6 July following the end of the relevant tax year, in line with the annual Employment Related Securities return. Miss that deadline and the options will generally lose their tax-advantaged status. This is not a technicality to manage loosely – build it into your process from the outset.

See our guide to EMI scheme eligibility for a full breakdown of the qualifying conditions, excluded activities, and common implementation pitfalls. For a quick overview, you can also watch our short video on top 5 tips for EMI share option schemes.

CSOP: More Accessible Than Many Businesses Realise

The Company Share Option Plan is the other main statutory tax-advantaged scheme available to UK companies, and it is one that many businesses overlook or underestimate. That is increasingly a mistake, particularly since the April 2023 reforms.

From April 2023, the individual employee limit doubled from £30,000 to £60,000 in market value of shares under option. Certain share class restrictions that had previously made CSOP difficult for VC-backed companies to use were removed. These were meaningful changes, not marginal ones.

The core tax treatment works in a similar way to EMI in the respects that matter most. If you grant options at market value, the exercise does not trigger income tax, employer NIC, or employee NIC. Any gain on a later sale falls into capital gains tax rather than income tax. The main structural constraint is that CSOP options must not generally be exercisable within three years of grant. This limits its usefulness for companies wanting flexibility on timing.

Where CSOP genuinely differs from EMI is in its reach. There is no company size limit, no gross assets cap, and no restriction on trading activities. CSOP is available to listed companies as well as private ones. There is no statutory working time requirement, though participants must be employees or full-time directors. This distinction matters for non-executives and consultants who might expect to be included.

The honest limitation is the individual cap. At £60,000 per employee, CSOP will not on its own deliver a meaningful equity stake for senior hires in businesses where the valuation has already moved significantly. A £60,000 option in a company worth £5 million is a different proposition entirely from the same grant in a company worth £50 million. In practice, CSOP works best either for companies ineligible for EMI that want some tax-advantaged delivery, or as part of a hybrid structure combining CSOP up to the limit with unapproved options above it.

Unapproved Options: Flexible, but the Tax Cost is Real

Unapproved share options, also called non-tax-advantaged options, carry none of the tax advantages of EMI or CSOP. They also carry none of the eligibility constraints. Any company can grant them to any person, in any amount, on whatever terms it chooses.

The tax treatment on exercise is materially less favourable. Any gain between the exercise price and the market value of the shares at the point of exercise is treated as employment income, attracting:

• income tax at the employee’s marginal rate
• employee NIC at the prevailing rates
• employer NIC at the prevailing rate (increased from 13.8% to 15% from April 2025, alongside a reduction to the secondary threshold)

NIC rates and thresholds change and should always be confirmed at the time of exercise. In a company where share value has increased substantially between grant and exercise, the employer NIC exposure can be a significant cost that the board needs to plan for.

Two elections are relevant and frequently misunderstood. A joint NIC election allows the employer to transfer some or all of the employer NIC liability to the employee by agreement. This approach is common in practice and you should consider it at the scheme design stage. Separately, a section 431 election is relevant where shares acquired on exercise are restricted securities; it determines how gains are split between income and capital for tax purposes. These are distinct instruments that serve different purposes. Neither is a substitute for the other, and both require careful tax advice.

Unapproved options are not a poor relation. They have a legitimate and important role:

• topping up EMI or CSOP grants where statutory limits have been reached
• incentivising consultants, advisers, and non-executive directors who fall outside EMI
• supporting international equity plans where cross-border consistency matters more than UK tax optimisation

For companies that cannot access either EMI or CSOP, they are often the only practical tool available.

How the Three Structures Compare

Understanding the differences between EMI, CSOP, and unapproved options is not about finding the “best” scheme in the abstract. It is about identifying which structure your company can actually use, and which delivers the best outcome within those constraints.

Tax efficiency

The gap between EMI and unapproved options is not marginal – it is the difference between a CGT event and an income tax event on potentially significant sums. An employee exercising an unapproved option over shares worth £200,000 more than the exercise price could face income tax of up to £90,000 and employee NIC of several thousand pounds more on that gain alone, depending on their earnings. The employer’s NIC exposure on the same exercise could be £30,000 or more. Under a qualifying EMI scheme, that same gain would be deferred to a CGT disposal and potentially taxed at a substantially lower rate. These figures are illustrative, but they reflect a real and material difference in outcomes that should drive the decision.

CSOP sits between the two: the same tax treatment as EMI on exercise and disposal, but subject to the individual limit and the three-year exercise restriction.

Eligibility

EMI is restricted to independent trading companies below HMRC’s gross assets and headcount thresholds at the time of grant. For options granted on or before 5 April 2026, those limits are £30 million of gross assets and fewer than 250 full-time equivalent employees. For options granted on or after 6 April 2026, the limits are scheduled to increase significantly – you should check the current HMRC guidance at the time of implementation rather than rely on figures that may have been superseded.

The following trading activities are excluded from EMI regardless of company size:

• banking and insurance
• property development
• farming
• legal and financial services

Employees must work at least 25 hours per week for the company, or at least 75% of their working time if less. CSOP has no size, asset, or activity restrictions, though participants must be employees or full-time directors. Unapproved options have no eligibility requirements at all.

Flexibility

Unapproved options give the most freedom. Vesting schedules, performance conditions, exercise triggers, and leaver provisions can all be designed without reference to any statutory framework. EMI and CSOP must operate within HMRC’s rules, but those rules leave considerable room for commercial tailoring. Exit-only vesting, time-based schedules, hybrid arrangements, and bespoke leaver provisions are all achievable within the framework.

Administration

All three structures require HMRC registration and annual reporting through the Employment Related Securities online service, with returns due by 6 July after the end of each tax year. You (the company) must agree a share valuation with HMRC’s Shares and Assets Valuation team before you grant EMI options. Neither requirement is onerous with proper advice and process in place, but both have hard deadlines that carry real consequences if missed.

What investors expect

In most VC and angel-backed businesses, an EMI option pool is the baseline expectation. Investors will typically look for a pool of between 10% and 20% of the fully diluted cap table, established at or around a funding round, and they will expect it to be EMI-qualified where the company is eligible. CSOP and unapproved structures are well understood by experienced investors. However, you will still need to explain them, and they may prompt questions at due diligence if you have not addressed EMI eligibility.

Which Structure Makes Sense for Your Business?

Early-stage and founder-led businesses

If your company meets the EMI eligibility criteria, the starting point is straightforward: implement EMI. The tax advantages are substantial, the structure is familiar to employees and investors, and it can be designed around your specific commercial requirements. A large number of technology, software, professional services, and consumer businesses qualify – many without realising it. EMI is almost always worth investigating before any other structure is considered. If you are in the software sector, our guide to selling a software company explains how option schemes fit into the wider sale process.

VC-backed and high-growth companies

For these businesses, timing is often the critical variable. EMI options are granted over shares valued at the date of grant, so implementing a scheme before a significant valuation step-up, ahead of a Series A, for example, locks in a lower exercise price and maximises the proportion of any future gain that falls into CGT rather than income tax. Companies that wait until after a major funding round frequently find that the per-employee limit has become a constraint on what they can offer to senior hires. If a fundraising round is approaching, this is a conversation to have with a solicitor before the term sheet lands, not after.

Businesses that have grown beyond EMI

Where a company has exceeded the EMI thresholds, CSOP is typically the primary tax-advantaged option. This applies where a funding structure has introduced a complication with the independence requirement.

A hybrid approach often makes the most commercial sense. CSOP grants apply up to the £60,000 limit. Unapproved options apply above that level for participants who need a larger economic stake. The income tax and NIC on the unapproved element create a real cost for the company and the employee. Careful structuring, including NIC elections and, where restricted shares are involved, section 431 elections, helps reduce that cost.

Larger businesses, listed companies, and excluded-activity firms

For companies whose trading activities or size take them outside both EMI and CSOP, unapproved options are the primary tool. We also explore alternative equity incentive schemes to EMI share options where options are not the right fit. The key is getting the scheme design right from the outset. We focus particularly on leaver provisions, exercise triggers, and how the scheme interacts with any future transaction. This ensures that participants have a clear and realistic understanding of when and how they will be able to realise value.

Our separate guide on choosing the best share scheme for your company tackles this question from a different angle.

What Can Go Wrong: Pitfalls Worth Knowing About

Even a well-designed scheme can produce poor outcomes if it is not properly managed after implementation. These are the issues we most commonly see in practice. We set out practical ways to avoid them in our top 5 recommendations for EMI share option schemes.

Disqualifying events under EMI

A number of events can cause an EMI option to lose its tax-advantaged status part-way through its life, including:

• a change in the company’s trading activities
• an employee falling below the working time threshold
• a corporate event that affects the company’s independence

When this happens, a gain accrues from the disqualifying event to the point of exercise. Authorities tax that gain as employment income rather than as a capital gain. The financial impact on the employee can be substantial. Do not treat EMI eligibility as a one‑off exercise that you assess once and file away. Review it whenever the business changes in a material way, and build ongoing monitoring into your routine corporate governance.

Funding rounds and dilution

A new investment round will dilute the existing option pool. More importantly, the terms of the round itself:

• preference share stacks
• anti-dilution provisions
• any investor requirement to refresh the option pool

Can significantly affect the value and appeal of outstanding options. Model the impact on existing option holders before you complete the round. Ask a solicitor to confirm whether you need to amend the option documentation or notify HMRC.

Exit planning

The tax treatment of options on a sale, management buyout, or IPO depends on several factors. You need to understand these factors well in advance:

• whether employees exercise options before or as part of the exit
• how you structure the consideration, as cash, loan notes or rollover equity, because each route produces different outcomes
• whether you have made all relevant elections in respect of any restricted shares
• whether you will satisfy the Business Asset Disposal Relief conditions at the point of disposal

A scheme that has not been built with exit in mind can produce avoidable tax charges for employees. A scheme that has not been maintained properly in the years leading up to a transaction can produce avoidable tax charges. These charges can arise at the moment employees should benefit from the value they helped create. We set out the key exit-related issues in our article on how to manage EMI and unapproved share options on a company sale.

Annual compliance

Register your scheme, file your ERS return by 6 July each year, and deal with any errors promptly. This task is not complicated, but it does require a clear, consistent process. Missed filings and inaccurate returns can generate penalties. In the case of EMI, they can put the tax-advantaged status of the scheme at risk.

Talk to The Jonathan Lea Network

A share option scheme is one of the most effective tools available to a growing business. It can make the difference between keeping a key hire and losing them. It can make the difference between a motivated leadership team and a disengaged one. But the value it delivers depends entirely on how well you design, implement, and manage it.

At the Jonathan Lea Network, we work with founder-led businesses, investor-backed companies, and growing firms across the UK. Our firm help with share scheme matters. We choose the right structure and agree a valuation with HMRC. We draft scheme documents, advise on disqualifying events, and manage annual compliance. Also, we work alongside tax advisers where appropriate and give practical, commercially grounded advice rather than generic guidance.

If you are thinking about introducing a share scheme, or want to review an existing arrangement before a funding round, a key hire, or a planned exit, we would be glad to help.

 

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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.