Unapproved (Non-Tax-Advantaged) Share Option Schemes

Flexible, commercial share option plans for UK and international teams

Unapproved share option schemes, also called non-tax-advantaged options, allow companies to grant equity incentives without needing to meet strict HMRC criteria or stay within statutory limits. They are often the quickest and most flexible way to offer meaningful equity to employees, directors, consultants and overseas team members.

These schemes sit outside the UK’s formal “tax-advantaged” regimes (such as EMI and CSOP). “Unapproved” does not mean “not allowed”, it simply means the options do not benefit from special tax reliefs. In most cases there is no tax on grant, and gains are usually taxed as income for recipients on exercise, but the commercial flexibility makes them ideal where EMI or CSOP are not available or not sufficient.

At Jonathan Lea Network, we design, document and implement unapproved option schemes for startups, scale-ups, SMEs, growth companies and established businesses across England and Wales. Our corporate, tax and employment specialists work together to ensure your plan is compliant, investor-friendly and genuinely motivating for your team.

Our team, based in Sussex and London, is known for clear advice, responsive service and strong value for money. We act as an extension of your in-house team, helping you put robust, practical incentives in place without unnecessary complexity.

Speak to an unapproved share option solicitor today. Call us on 01444 708 640 or complete our online enquiry form to arrange a free introductory call.

What is an unapproved share option scheme and why does it matter?

Understanding unapproved (non-tax-advantaged) options.
An unapproved share option scheme is a company-created incentive plan under which selected people are granted the right (but not the obligation) to acquire shares in the company at a fixed “exercise price” in the future. Unlike EMI or CSOP, unapproved options:

• Do not need to meet HMRC qualification rules or gain advance approval, so they are more flexible and faster to implement.
  
• Can be granted to a wider range of people, including non-employee directors, consultants, advisers and overseas team members.
  
• Do not attract statutory tax reliefs, so the tax treatment is generally less favourable for participants but more straightforward procedurally.
  

Key features and tax points.

• Options can be granted at market value, at a discount or even at nil cost. However, granting deeply discounted or nil-cost options can, in some cases, bring tax forward to grant or create larger income tax charges at exercise, so the structure needs careful thought.
  
• For most UK employees and officeholders there is no tax at grant. At exercise, the usual rule is that income tax is due on the “spread” (the difference between market value at exercise and the exercise price). If the shares are “readily convertible assets”, PAYE and both employee and employer National Insurance will normally apply; otherwise, income tax and NIC may be dealt with through self-assessment or agreed payroll processes.
  
• Any further growth in value after exercise and before sale is usually subject to capital gains tax when the shares are sold, subject to the individual’s allowances and rates.
  

Why unapproved options are widely used.
Businesses choose unapproved schemes when they:

• Want to offer equity quickly without the lead time or constraints of EMI or CSOP.
  
• Employ people who are ineligible for EMI (for example, consultants, non-executive directors, some founders or overseas staff).
  
• Have outgrown EMI limits, need to grant above-EMI awards, or operate in trades that do not qualify for EMI.
  
• Want to use a single, consistent plan for both UK and non-UK participants.
  

Unapproved options plug the gaps left by the statutory schemes, providing a flexible toolset for modern, international and investor-backed businesses.

How unapproved share option schemes work

How options are granted.
Participants receive an option agreement giving them the right to acquire a fixed number of shares at a set exercise price in the future. The agreement will typically specify:

• The number or percentage of shares under option.
  
• The exercise price (often set at a recent market value, but sometimes at a discount or nil).
  
• Vesting conditions (for example, length of service or performance targets).
  
• Any performance or milestone conditions, such as revenue, product or project goals.
  
• Leaver provisions and what happens if the participant leaves.
  

Vesting and performance conditions.

• Time-based vesting might run over three to four years, often with a “cliff” period before any part vests.
  
• Performance-based vesting might be tied to financial metrics, project delivery or strategic milestones.
  
• Hybrid structures can combine time and performance, for example a percentage vesting as time passes and the remainder vesting on hitting specific targets.
  

Exercise and acquiring shares.
Once options have vested and any conditions are met, the participant may choose to exercise:

• On exercise, they pay the exercise price to the company (or selling shareholders), and in return they receive shares.
  
• The shares may be subject to restrictions in the articles and shareholders’ agreement (for example, pre-emption rights, drag and tag, lock-ins, or buy-back provisions).
  
• In an “exit-only” scheme, exercise may only be allowed immediately before a sale, with options automatically exercised and shares immediately sold into the transaction.
  

Tax treatment in typical UK cases.

• Usually no tax arises on grant for employees and directors, provided the option is not structured in a way that triggers immediate income.
  
• At exercise, the spread (market value minus exercise price) is generally treated as employment income. Where the shares are readily convertible assets, the company must operate PAYE and account for both employee and employer NIC.
  
• Gains after exercise, from an eventual sale of the shares, are typically subject to capital gains tax on any further increase in value.
  
• For contractors and overseas participants, tax rules vary by jurisdiction and may not involve UK PAYE at all; local advice is often required.
  

We explain how these rules apply in your specific situation, and we work with your accountants to ensure the scheme and any valuations are robust and defensible.

Why choose unapproved options instead of EMI or other schemes?

Flexibility beyond EMI and other tax-advantaged plans.
Unapproved options are often chosen because they can be shaped precisely around your commercial needs. Compared with EMI or CSOP:

• Eligibility is broader: you can include non-UK staff, consultants, non-executive directors and individuals who fail EMI tests.
  
• There are no statutory grant limits, so you can offer large awards to senior hires or founders above EMI caps.
  
• You can design vesting, performance conditions and leaver rules without being constrained by EMI legislation.
  

Suitability for international and non-employee recipients.
Where your team is spread across multiple countries or includes contractors and advisers, unapproved options allow consistent participation, while local tax and regulatory considerations are handled separately. This makes a single global equity philosophy easier to implement.

Ability to mirror investor economics.
Unapproved options can be drafted to follow the economic terms in your shareholder and investment agreements, including different share classes, waterfalls and exit preferences. Extra care is needed to keep the plan understandable, fair and administratively manageable, but when done well this can strongly align management with investor returns.

Speed and commercial agility.
Because you do not need HMRC approval or advance clearance, and you are not constrained by a statutory template, unapproved options can be designed and launched quickly. This is invaluable when you are making time-sensitive offers to key hires or tying in a leadership team around a deal.

In many cases, the optimal solution combines tax-advantaged schemes (like EMI or CSOP) where available, with unapproved options or phantom arrangements for those who fall outside the statutory framework. We routinely design such hybrid approaches.

When are unapproved share options the right choice?

Typical situations where unapproved schemes work best.

• Your company or trade does not qualify for EMI, or you have exceeded EMI limits, but you still want equity-based incentives.
  
• You have a mix of UK employees, international staff and consultants, and you want a single commercial framework for options.
  
• You need a bespoke scheme for founders or senior executives whose packages are too large or too complex for EMI.
  
• You want an “exit-only” structure so that equity only crystallises on sale, keeping day-to-day administration light.
  
• You are planning for a future fundraising or exit and need a scheme that can integrate cleanly into investor and buyer due diligence.
  

We will talk you through where unapproved options sit relative to EMI, CSOP, growth shares and phantom shares, and help you choose the most appropriate combination for your business.

Step 1: Understanding your equity, tax and investor landscape

Clarifying your incentive objectives.
We begin by understanding what you want your option scheme to achieve: attracting talent, retaining key staff, rewarding founders, aligning with an exit, or a combination of these. We then map those goals to design options such as time-based vesting, performance triggers and exit structures.

Reviewing your corporate and investor framework.
We review your cap table, articles of association, shareholders’ agreement, investment documents and any existing share plans. We ensure the new scheme:

• Respects existing investor consents and reserved matters.
  
• Fits within pre-emption rights and share class structures.
  
• Does not inadvertently override or conflict with key investor protections.
  

Assessing tax and reporting requirements.
We explain:

• How income tax and NIC are likely to apply on exercise.
  
• How corporation tax deductions may arise for the company.
  
• Your Employment Related Securities (ERS) obligations, including the need to report option grants and exercises via HMRC’s annual online ERS returns, and the penalties for late or missed filings.
  

Considering international and regulatory issues.
Where participants are based overseas, or where the structure might interact with securities regulation, we highlight potential issues early and, where necessary, coordinate with foreign advisers so the scheme remains compliant in all relevant jurisdictions.

Step 2: Designing your unapproved share option scheme

Choosing who participates and on what terms.
We help you decide which roles and individuals should receive options, and whether everyone should be on the same terms or whether different tiers (for example, executives, key contributors, advisers) should have slightly different vesting and performance conditions.

Vesting, performance and exit conditions.
We design vesting and performance criteria that genuinely support your business plan. This may include:

• Time-based vesting to encourage long-term retention.
  
• Performance triggers aligned with revenue, profit, product releases or strategic milestones.
  
• Exit-focused vesting where options only fully crystallise on a sale or IPO.
  

Good leaver and bad leaver rules.
We draft clear definitions of good leaver (for example death, disability, redundancy, agreed retirement) and bad leaver (for example gross misconduct, resignation before a certain period), along with the consequences for their options. This clarity is vital for avoiding disputes and ensuring that equity rewards are directed to those who continue to drive value.

Share terms and restrictions.
We ensure that the shares under option are properly defined, whether they are ordinary shares, growth shares or a specific class, and that the rights and restrictions (for example voting, dividends, pre-emption) are consistent across your articles, shareholders’ agreement and option documentation.

Step 3: Drafting plan rules, option agreements and approvals

Core scheme rules in plain English.
We prepare a set of plan rules that set out how the scheme works: eligibility, grant, vesting, exercise, leavers, corporate actions, adjustments and administrative processes. We aim for clear, accessible drafting that participants can understand, without sacrificing legal robustness.

Individual grant agreements.
Each participant receives a grant letter or option agreement specifying:

• The number of options granted.
  
• The exercise price and, where appropriate, how it was determined.
  
• Vesting schedule and conditions.
  
• Any specific terms or restrictions that apply only to them.
  

Valuation and exercise price decisions.
We work with your accountants or valuation specialists to determine a sensible and supportable market value for the shares at grant, so you can decide whether to grant at that value, a discount, or a nil exercise price. We explain how each approach affects future tax outcomes and investor perception.

Board and shareholder approvals.
We draft board minutes and any necessary shareholder resolutions required to:

• Approve the scheme rules.
  
• Authorise the grant of options over a pool of shares.
  
• Approve any amendments to articles or share capital that are needed to support the scheme.
  

This ensures your scheme is properly authorised in line with Companies Act requirements and your corporate governance framework.

Step 4: Implementation, administration and ongoing support

Launching the scheme and communicating it to participants.
We support you in explaining the scheme to your team, helping participants understand how vesting, exercise and tax work in straightforward terms. Clear communication maximises the perceived value of the awards.

Ongoing record-keeping and ERS filings.
We help you maintain accurate records of:

• Grants, vesting events and exercises.
  
• Changes to share capital linked to option exercises.
  
• Leavers and how their options were treated.
  We also assist with mandatory Employment Related Securities reporting to HMRC after grants and exercises, and with annual ERS returns, so that you stay on top of compliance and avoid penalties for late or incomplete filings.
  

Adapting the scheme as the company evolves.
As you raise further funding, reorganise your group, expand overseas or move towards exit, we may need to adjust or layer additional arrangements on top of your existing plan. We work with you over time to keep the scheme aligned with your changing needs.

Supporting investment and exit due diligence.
Option schemes are closely reviewed by investors and buyers. We ensure the plan is clearly documented, consistent and easy to explain, which reduces friction and delays in fundraising or M&A transactions.

Who we help with unapproved share option schemes

Startups and scale-ups needing fast, flexible equity incentives.
We assist earlier-stage businesses that want to move quickly in competitive hiring markets, offering equity packages that are credible and properly documented, even before EMI or CSOP can be implemented or fully utilised.

Companies ineligible for EMI or facing EMI limits.
We work with companies whose size, trade or shareholding structure means EMI is not available, or where EMI limits are already fully used, to design unapproved options that still deliver strong alignment and retention.

Internationally staffed businesses.
For companies with key staff in multiple jurisdictions, we help create unapproved schemes that can work effectively alongside local taxes and rules, giving everyone a stake in the same growth story while respecting local law.

Founders, directors and senior executives.
We advise individuals on the terms of unapproved options they are offered, explaining tax implications, vesting, leaver risks and how their equity fits within the wider cap table and investor arrangements.

Owner-managed and mid-market businesses aligning leadership with value.
As SMEs mature, they often seek to formalise long-term incentives for senior managers. Unapproved options offer a flexible route to share value without excessive complexity.

Common challenges and how we help solve them

“We need to give options to contractors, consultants or overseas hires.”
We design unapproved schemes that allow non-employee participants to share in equity growth, while taking account of local tax and regulatory issues and ensuring the UK company’s arrangements remain compliant and clearly documented.

“We want the freedom that EMI doesn’t allow.”
Where EMI is too restrictive, we structure unapproved options with bespoke vesting, performance conditions and leaver provisions, while clearly explaining how the tax treatment differs so there are no surprises for participants.

“Our investor documents and share classes are complicated.”
We map your option scheme to your existing share structure, ensuring that options track the correct class of shares and that the economics (such as preference rights and waterfalls) are understood. This helps avoid conflict with investor protections.

“We are worried about tax, ERS filings and compliance.”
We guide you through PAYE, NIC, corporation tax deductibility and Employment Related Securities reporting, helping you avoid common pitfalls, missed filings and HMRC penalties.

“We need a scheme quickly, but we still want it to be robust.”
We can move at pace where needed, without sacrificing clarity, legal quality or future investor readiness. This is especially important when using options to secure a key hire or support a time-sensitive transaction.

Why choose Jonathan Lea Network for unapproved option schemes?

Joined-up corporate, tax and employment advice.
Our schemes are built with a full understanding of company law, tax rules and employment protections, so issues are dealt with at design stage rather than emerging later.

Clear, client-friendly documentation.
We draft plan rules and agreements in plain English, so your board, investors and participants can all understand how the scheme works. This builds trust and reduces misunderstandings.

Tailored, commercially-driven design.
We do not simply drop in a template. Each scheme is tailored to your goals, sector, investor profile and growth plans, ensuring the incentives feel relevant and effective.

Transparent, value-focused pricing.
We offer fixed or staged fees wherever we can, and we explain costs upfront. You stay in control of budget while still getting high-quality specialist support.

Ongoing support as your business grows.
We stay alongside you as your company and cap table evolve, helping you adjust, supplement or rationalise your option arrangements over time.

What to do now

If you are considering an unapproved share option scheme—or if you already have one and want to ensure it is still fit for purpose—taking structured advice early will save time and cost later and will reassure investors.

All enquiries are confidential. Once instructed, our advice is generally protected by legal professional privilege.

Contact us:

• Email: wewillhelp@jonathanlea.net
• Phone: 01444 708640
• Make an enquiry online

Unlock your company’s potential. Reward future success. Protect your business.

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