EMI vs unapproved options — why the label changes everything
Share options come in flavours, and in the UK the flavour is mostly about tax. The two you'll meet most often in private companies are EMI options (Enterprise Management Incentives, a government-approved scheme) and unapproved options (everything that isn't in an approved scheme). The paperwork can look nearly identical. The outcomes are not.
EMI, the tax-advantaged route
EMI is a statutory scheme designed for smaller, higher-risk companies. When the qualifying conditions are met and the options are granted with an exercise price at or above the shares' agreed market value:
- No income tax or National Insurance at grant or at exercise on the growth — the gain is taxed as capital gains when you eventually sell.
- Business Asset Disposal Relief can apply from grant, not from exercise: the two-year qualifying clock generally runs from when the option was granted, and the usual 5% shareholding requirement doesn't apply to EMI shares. Our BADR guide covers the current rates and limits.
- Valuations are typically agreed with HMRC in advance, which removes a lot of argument later.
The conditions matter: the company must be independent, have gross assets under £30m and fewer than 250 full-time-equivalent employees, and carry on a qualifying trade. Individual grants are capped (£250,000 of unrestricted market value per person over three years). Certain events — like the company being acquired or the holder dropping below the working-time requirement — are disqualifying events that start a clock on the tax advantages.
Unapproved, the default route
"Unapproved" simply means outside any approved scheme — common when a company has outgrown EMI limits or the holder doesn't meet the requirements. The headline difference:
- Exercise is an income tax event. The difference between the exercise price and the market value at exercise is generally taxed as employment income — at rates of up to 45%, plus National Insurance in many private-company situations.
- Growth after exercise is then in capital-gains territory.
That timing creates a real-world problem: exercising an unapproved option can generate a tax bill before any shares are sold — a "dry" tax charge, often managed by exercising only at the point of an exit when cash arrives the same day.
Why this matters for reading your own package
The same headline — "options over 2% of the company" — can be worth materially different amounts after tax depending on the scheme type, the exercise price, and when exercise happens. It's also why scheme type is one of the first fields worth confirming from your actual grant documents rather than from memory: the word "EMI" appearing in a heading is not the same as the conditions being met and maintained.
FAQ
How do I know if my options are EMI?
Your option agreement normally says so explicitly, and there is usually an HMRC valuation agreement and a notification record from when the grant was made. If the paperwork is silent, that itself is worth clearing up with the company.
What is a disqualifying event?
An event after which EMI's tax advantages start to erode — common examples are the company being taken over, ceasing to meet the trading requirements, or the holder no longer meeting the working-time commitment. Exercising within 90 days of a disqualifying event generally preserves the position, which is why these deadlines get taken seriously.
Are unapproved options bad?
No — they're just taxed differently. For companies past the EMI limits they're often the only practical route, and a well-priced unapproved option over a growing business is still a valuable thing. The point is to model the after-tax outcome honestly, not to assume the EMI treatment applies.