How Employment-Related Securities Work for Employers

Employment-related securities (ERS) allow you to offer shares or share options in your company to employees as a way to reward, retain or incentivise them. When you grant shares or securities to employees, there are important tax implications for both you and your workforce. Understanding the rules around ERS helps you choose the right approach and meet your reporting obligations to HMRC.

What are employment-related securities?

Employment-related securities are shares or other securities in your company that you offer to employees. The two most common types are:

• Share options — the right to buy a certain number of shares at a fixed price at some point in the future
• Share awards — giving employees actual shares, either free or for less than their market value

You can run more than one scheme at the same time, and you can mix tax-advantaged and non-tax-advantaged schemes. These can be formal schemes with set rules, or informal arrangements with one-off awards.

Reporting requirements for employers

You must submit an ERS return to HMRC online every year for all schemes, including one-off awards or gifts of shares. The deadline is 6 July following the end of the tax year.

Even if there are no reportable events during the year, you still need to submit a nil return.

Reportable events include:

• The grant and exercise of share options
• Award of shares and other securities to UK employees or directors
• Changes in rights associated with the securities
• Off-market transactions
• Awards of carried interest

Before you start offering ERS, you should register the scheme with HMRC.

Tax-advantaged share schemes

Tax-advantaged share schemes offer significant tax benefits. If you offer employees company shares or share options through one of these schemes, they may not have to pay Income Tax or National Insurance on the gain when they receive the shares.

There are four tax-advantaged share schemes (TASS):

• Share Incentive Plans (SIP)
• Save As You Earn (SAYE)
• Company Share Option Plans (CSOP)
• Enterprise Management Incentives (EMI)

You might be able to claim a Corporation Tax deduction for the costs of setting up and running a share scheme, as well as an additional deduction when the shares are provided.

Share Incentive Plans (SIP)

SIPs are tax-advantaged plans that must be available to all employees. They allow you to award shares to employees in flexible ways and encourage employees to save regularly to buy shares in your company.

Employees will not pay Income Tax or National Insurance on the value of their shares if they keep them in the plan for 5 years. If they take shares out early, they will pay Income Tax and National Insurance on the value.

You can offer four types of shares under a SIP:

• Free shares
• Partnership shares (bought by employees from their salary)
• Matching shares (free shares given based on partnership shares purchased)
• Dividend shares (bought using dividends from plan shares)

Save As You Earn (SAYE)

SAYE is a tax-advantaged plan for all employees that allows them to buy shares with their savings for a fixed price. Employees agree to a special savings contract to buy shares at the end of a fixed term with regular weekly or monthly savings.

You can give employees the choice to buy share options in either 3 or 5 years' time, at either:

• The market value on the date of grant, or
• A discount of up to 20% of that market value

The maximum amount an employee can save is £500 per month out of net pay.

Employees will not pay Income Tax or National Insurance on the difference between what they pay for the shares and what the shares are worth. You can offer SAYE share options every year, so it's possible for an employee to receive shares each year without any Income Tax or National Insurance arising.

Company Share Option Plans (CSOP)

CSOP is a tax-advantaged, discretionary share option plan. This means you can decide which employees to grant options to. The price must not be less than the market value at the time the option is granted.

From 6 April 2023, each employee can be given up to £60,000 of options. This is £30,000 for options granted before 6 April 2023.

Your employee does not need to pay Income Tax or National Insurance on any gain when acquiring the shares if the option is exercised between 3 and 10 years after the option was granted.

If employment ends in certain circumstances, the individual may be able to exercise options within 6 months of employment ending without paying Income Tax or National Insurance on any gain, depending on the terms of the option.

If the individual dies before exercising the option, their personal representative may be able to exercise the option without paying Income Tax or National Insurance, provided this is within 12 months of death.

Enterprise Management Incentives (EMI)

EMI is a tax-advantaged share scheme designed for smaller companies. Most companies may be eligible to operate an EMI scheme if they have:

• Gross assets of £120 million or less
• Fewer than 500 full-time employees
• A total value of unexercised options granted under EMI not exceeding £6 million

These increased limits apply from 6 April 2026. Before this date, the limits were:

• Gross assets of £30 million or less
• Fewer than 250 full-time employees
• A total value of unexercised options not exceeding £3 million

For companies where the increased limits apply, the limit on the exercise period has increased from 10 years to 15 years for all options that have not already lapsed, expired or been exercised. The option must be exercised on or after 6 April 2026 to take advantage of the increased holding period.

The increase in eligibility criteria and extended holding period will not apply if your company has its registered office in Northern Ireland and trades in goods or the provision of electricity.

Your employees are eligible if they work at least 25 hours a week, or if less, 75% of their total working time. You can grant share options up to the value of £250,000 to each employee.

Notifying HMRC about EMI options

You must tell HMRC about a grant of an EMI option:

• Within 92 days of the date of grant, if the option was granted before 6 April 2024
• Before 6 July following the end of the tax year in which the grant is made, if the option was granted on or after 6 April 2024

If you fail to notify HMRC within these deadlines, you risk losing any tax benefits for both you and your employees.

Employees can exercise these options without any Income Tax or National Insurance contributions if they:

• Bought the shares at a price at least equal to the market value on the day the option was granted
• Take their options out of the scheme within ten years of the date of grant (or 15 years for options exercised on or after 6 April 2026 where the increased limits apply)
• Have no disqualifying event

A disqualifying event can include a company reorganisation (unless qualifying replacement options are granted) or a company no longer meeting the trading activity requirements.

Sources

• How employment related securities work if you're an employer

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.