Advanced Taxation (UK) · Income tax: income from employment

Share Schemes: Approved and Unapproved Options for ACCA ATX

Updated 11 October 2026 · Fact-checked

Employee share schemes reward staff with shares or options. Tax-advantaged schemes (EMI, CSOP, SAYE, SIP) give relief from income tax and NIC if conditions are met, leaving CGT on sale. Unapproved options are taxed as employment income on exercise, with NIC if the shares are readily convertible, and CGT on later sale.

Understand Share Schemes: Approved and Unapproved

A share option gives an employee the right to buy shares at a fixed price (the exercise price) in the future. If the share price rises, the employee gains. The tax question is: when is that gain taxed, as what, and at what rate?

With an unapproved option the answer is harsh. There is normally no tax on grant. On exercise, the difference between the market value of the shares and the price paid is taxed as employment income. NIC also applies if the shares are readily convertible assets, for example shares listed on a stock exchange. The employee pays income tax (and employee NIC) and the employer pays 15% secondary Class 1 NIC. The employer gets a corporation tax deduction for the same amount. After exercise, a later sale is a normal CGT disposal with a base cost equal to the market value at exercise.

The tax-advantaged schemes (often still called approved schemes) swap that employment income charge for CGT. If the conditions are met, the employee pays no income tax or NIC on grant or exercise, and pays CGT on the gain when the shares are sold. The four schemes are EMI, CSOP, SAYE and SIP. EMI and CSOP can be offered to selected employees. SAYE and SIP must be offered to all eligible employees on similar terms.

Key features:
- EMI (Enterprise Management Incentive): for smaller independent trading companies. Up to £250,000 of unexercised options per employee, and £3 million across the company. No income tax or NIC on exercise if the exercise price is at least the market value at grant. The company needs gross assets of no more than £30 million and fewer than 250 employees. Options must be exercised within 10 years of grant.
- CSOP (Company Share Option Plan): up to £60,000 of unexercised options at exercise price per employee. No income tax if exercised between 3 and 10 years after grant (early exercise is allowed only in specified leaver cases). Exercise price must not be manifestly less than market value at grant.
- SAYE (Save As You Earn): the employee saves monthly under a 3 or 5 year contract, between £5 and £500 a month, and uses the savings (with any bonus) to buy shares. The exercise price can be set at up to a 20% discount to market value at grant. No income tax on grant or exercise.
- SIP (Share Incentive Plan): shares held in trust. Free shares up to £3,600 a year, partnership shares bought from pre-tax pay up to £1,800 a year or 10% of salary if lower, and matching shares up to two for each partnership share. Full relief on income tax and NIC applies if shares stay in the plan for five years.

For the employer, a corporation tax deduction is generally available for the cost of providing shares or the gain on options under these schemes. The employer pays no NIC where the employee has no income tax charge.

EMI has a special CGT advantage. For business asset disposal relief, the holding period runs from the date the option was granted, not from exercise. The gain can then be taxed at the 14% rate given in the tax tables, up to the £1,000,000 lifetime limit. Otherwise the CGT rates are 18% and 24%.

Key rules to remember

Unapproved option: taxable amount on exercise: Employment income = (market value at exercise − price paid) × number of shares; Taxed at the employee's marginal income tax rates. Employee NIC is 8% (to £50,270) or 2% above, and employer NIC is 15%, only if shares are readily convertible assets.
Base cost after a taxed exercise: Base cost = price paid + amount charged to income tax (= market value at exercise); Use this to avoid double taxation when the shares are later sold.
EMI: charge on a discounted option: Income tax charge on exercise = (market value at grant − exercise price) × shares; Arises only if the exercise price was below market value at grant. Any growth after grant is free of income tax. NIC applies too if shares are readily convertible.
EMI limits: £250,000 per employee; £3 million per company; gross assets ≤ £30 million; fewer than 250 employees; exercise within 10 years; Values are measured at market value at grant, ignoring any restrictions on the shares.
CSOP conditions: Limit £60,000 at exercise price; exercise between 3 and 10 years after grant; Exercise in under 3 years normally brings an income tax charge unless a leaver reason applies.
SAYE conditions: Saving £5 to £500 a month; 3 or 5 year contract; option price ≥ 80% of market value at grant; Must be open to all eligible employees on similar terms.
SIP limits: Free shares £3,600 a year; partnership shares lower of £1,800 or 10% of salary; matching up to 2:1; Removal from the plan before 5 years gives an income tax charge, and the charge is higher if removed before 3 years.
CGT on disposal of scheme shares: Gain = proceeds − base cost − allowable costs; less annual exempt amount £3,000; taxed at 18% or 24%; If BADR applies (EMI), the rate is 14% up to the £1,000,000 lifetime limit.

How to solve Share Schemes: Approved and Unapproved questions

Use the same sequence for any share scheme question. It keeps you from missing the NIC, employer and CGT parts that carry marks.

1Identify the scheme: unapproved option, EMI, CSOP, SAYE or SIP. Check the facts for conditions (company size, limit, timing, all-employee requirement).
2Test the conditions. If a condition fails, say so and treat the option as unapproved or apply the specific fallback charge.
3State the position on grant: normally no tax. Note any exception, such as an EMI option granted at a discount.
4Work out the position on exercise: income tax and NIC charge, if any, using market value at exercise less price paid (or the discount at grant for EMI). Say whether the shares are readily convertible assets.
5Deal with the employer: secondary Class 1 NIC at 15% where relevant, and the corporation tax deduction.
6Work out the CGT on later sale: proceeds less base cost, then the annual exempt amount of £3,000, then the 18%, 24% or BADR 14% rate.
7Compare alternatives if asked, with figures, and give advice on the best scheme or timing. Add a short conclusion for professional skills marks.

Quickest way: Three-column check: grant, exercise, sale

When to use it: Use when time is short or when a question asks you to compare schemes.

Draw three columns: Grant, Exercise, Sale. Write the scheme name at the top.
In each column, write the income tax, NIC and CGT result in a few words. Unapproved: nil, income tax and NIC, CGT. EMI, CSOP, SAYE (conditions met): nil, nil, CGT.
Put numbers in: exercise charge = market value − price paid; base cost = amount paid (plus any amount taxed).
Add the employer line: 15% NIC only where employee has a taxable amount on shares that are readily convertible, and a corporation tax deduction.
Finish with the CGT calculation and a one-line recommendation.

Common mistakes in Share Schemes: Approved and Unapproved

Taxing the EMI option on the full gain at exercise.
Students copy the unapproved treatment automatically.
Fix: For an EMI option granted at or above market value, there is no income tax or NIC on exercise. The whole gain goes to CGT. Only a discount at grant is taxed.
Using the exercise price as base cost after an unapproved option was taxed.
Students forget the amount already charged to income tax.
Fix: Base cost is the price paid plus the amount taxed as employment income, which equals market value at exercise.
Forgetting NIC, or charging employer NIC on non-listed shares by default.
NIC is treated as a side issue, and the readily convertible asset test is skipped.
Fix: State whether the shares are readily convertible assets. If yes, employee NIC and employer NIC at 15% arise on the taxable amount. If no, say NIC does not apply at exercise.
Applying the normal CGT rates to EMI shares without considering BADR.
Students think BADR needs two years of owning the shares.
Fix: For EMI the holding period starts at grant of the option. Check the two-year employment and holding conditions, then use the 14% rate within the £1,000,000 limit.
Ignoring the all-employee rule for SAYE and SIP, or the timing conditions for CSOP.
Students memorise the benefits but not the conditions.
Fix: List the conditions in a short checklist and test them against the facts. Say what happens if a condition fails.
Forgetting the employer's corporation tax deduction.
The question is framed around the employee.
Fix: When a question asks about employer and employee, give a separate employer line covering NIC and the deduction.

Worked examples

Example 1

Aziz is a director of a listed company and is paid a salary of £60,000 a year. Three years ago he was granted an unapproved option over 10,000 shares at an exercise price of £2.00 a share. He exercises the option when the shares are worth £5.50, and sells all the shares later for £8.00 each. Calculate the income tax, NIC and CGT consequences for Aziz, and the NIC for the company. Assume he has no other gains in the year.

Show the solution

Grant: no tax charge on grant of an unapproved option.
Exercise: taxable amount = (£5.50 − £2.00) × 10,000 = £35,000 employment income.
Aziz is already a higher rate taxpayer, so income tax = £35,000 × 40% = £14,000.
The shares are listed, so they are readily convertible assets. Employee NIC at 2% (above £50,270) = £35,000 × 2% = £700.
Employer secondary Class 1 NIC = £35,000 × 15% = £5,250. The company also gets a corporation tax deduction of £35,000.
Sale: proceeds = 10,000 × £8.00 = £80,000. Base cost = £2.00 × 10,000 paid + £35,000 taxed = £55,000.
Gain = £80,000 − £55,000 = £25,000. Less annual exempt amount £3,000 = £22,000 taxable.
Aziz is a higher rate taxpayer, so CGT = £22,000 × 24% = £5,280.

Answer: Income tax £14,000 and employee NIC £700 on exercise; employer NIC £5,250 (with a £35,000 corporation tax deduction); CGT £5,280 on the later sale.

Example 2

Priya is a full-time employee of a qualifying unquoted trading company and is granted an EMI option over 20,000 shares at £4.00 each, which is the agreed market value at grant. She exercises four years later when the shares are worth £10.00, and sells all the shares two years after that for £12.00 each. She has no other gains in the year and is a higher rate taxpayer. Explain the tax and calculate the CGT, comparing it with the CGT if business asset disposal relief did not apply.

Show the solution

Grant: no income tax or NIC on grant of a qualifying EMI option.
Exercise: the exercise price equals market value at grant, so there is no discount. No income tax or NIC arises on exercise, even though the shares are worth £10.00 then.
Sale: proceeds = 20,000 × £12.00 = £240,000. Base cost = 20,000 × £4.00 = £80,000. Gain = £160,000.
BADR: for EMI shares the two-year holding period runs from the grant of the option. Priya has been employed and holding the option or shares for well over two years before the sale, so BADR is available, with no 5% shareholding test. The gain is within the £1,000,000 lifetime limit.
Deduct the annual exempt amount of £3,000 from the BADR gain, as it is her only gain. Taxable = £157,000.
CGT at 14% = £157,000 × 14% = £21,980.
Without BADR the 24% rate applies: £157,000 × 24% = £37,680.
Saving from BADR = £37,680 − £21,980 = £15,680.

Answer: No income tax or NIC arises. CGT is £21,980 with BADR at 14%, compared with £37,680 at 24% without it, a saving of £15,680.

Exam tips

Always identify whether the shares are readily convertible assets before charging NIC on an unapproved option. Write a one-line statement of your assumption.
List the conditions of each scheme as a short checklist and test them against the scenario. Conditions tested against facts score application marks.
Write the base cost explicitly for each scenario. Markers look for the correct base cost after a taxed exercise.
In planning questions, quantify the saving between schemes, such as unapproved versus EMI, and recommend one. Add a short caveat on risks, like a disqualifying event.
Use the tax tables provided for NIC and CGT rates and the BADR limit. Do not rely on memory for numbers that appear in the tables.

Practice questions from Income tax: income from employment

Share Schemes: Approved and Unapproved: frequently asked questions

What is the difference between approved and unapproved share options?

Tax-advantaged (approved) schemes such as EMI, CSOP and SAYE give relief from income tax and NIC on exercise if the conditions are met, so the gain is taxed to CGT instead. An unapproved option has no such relief, so the gain on exercise is taxed as employment income, with NIC if the shares are readily convertible.

What are the tax advantages of EMI options?

If the exercise price is at least market value at grant, there is no income tax or NIC on grant or exercise. The employee pays CGT on sale. The BADR holding period runs from grant, so a 14% rate can apply up to the £1,000,000 lifetime limit. The employer also gets a corporation tax deduction.

Do I need to know exact EMI and CSOP limits for ATX?

The scheme limits are not in the tax tables, so you should know them. For EMI that is £250,000 per employee, £3 million per company, gross assets of up to £30 million and fewer than 250 employees. For CSOP it is £60,000 of unexercised options.

Which schemes must be offered to all employees?

SAYE and SIP must be offered to all eligible employees on similar terms. EMI and CSOP can be offered to selected employees, which is why they are used for key staff.

How is CGT calculated on shares acquired through a scheme?

Take sale proceeds less base cost. Base cost is the price paid, plus any amount already taxed as employment income. Deduct the £3,000 annual exempt amount, then apply 18% or 24%, or 14% where BADR applies.