Before a startup hires its first senior engineer or closes its seed round, investors and advisers often ask about the employee option pool. The questions that land on accountants are rarely about pool size (that is a commercial and dilution decision for investors and legal advisers) but they are frequently about the tax mechanics: what scheme to use, what HMRC needs to know, and what happens if the company grows past the qualifying tests. This guide covers the compliance side only.
What an option pool is, in compliance terms
An option pool is a reserved block of shares set aside by the company to grant to employees, directors and sometimes advisers as options. The pool is a cap-table reservation, not a distinct legal entity or account. Shares typically remain unissued until an option is exercised, at which point new shares are issued (diluting existing holders). In the UK, where the company qualifies, the most tax-efficient way to grant from the pool is as Enterprise Management Incentives (EMI) options, which allow up to £250,000 of unexercised option value per employee and £3m across the company, and must be reported to HMRC via the Employment-Related Securities (ERS) regime.
This page covers tax and compliance only. It does not advise on how large the pool should be as a proportion of equity: that is a commercial and dilution decision to make with your investors, legal advisers and board.
Sizing the pool: framing only, not investment advice
Founders typically reserve a percentage of the fully diluted share capital for the option pool before or at a funding round, often at an investor's request. The specific percentage is a negotiated, commercial decision that depends on hiring plans, investor dilution preferences and the stage of the company. This page gives no view on pool size and does not model dilution scenarios as advice. The right percentage to reserve is a matter for your company's legal and financial advisers, not a tax rule.
The same line holds for dilution. When options are exercised, new shares are issued and existing holders are diluted, but how much is a function of pool size, exercise price and timing, all cap-table matters for your board and investors. The tax rules (the EMI limits and ERS reporting) bite on the number and value of options granted, not on the dilution percentage, so staying inside the £250,000-per-employee and £3m-company caps is a compliance job while the dilution maths sits with your legal and financial advisers.
What is a tax and compliance matter is how the reserved pool is subsequently granted to employees, how those grants are valued, and what must be reported to HMRC. Those are the questions this guide addresses.
Granting from the pool as EMI options
For qualifying UK companies, EMI is the standard tax-efficient way to grant from the option pool. HMRC's EMI guidance sets out the tests that must be met at the time of each grant.
Company-level tests
- Gross assets of £30m or less at the date of grant (see the gross-assets test detail).
- Fewer than 250 full-time-equivalent employees.
- The company must not carry on excluded activities (broadly: financial activities, property development, farming, legal services and certain other trades).
- Total unexercised EMI options across the company must not exceed £3m in value.
Employee-level tests
- Each employee or director must meet the working-time requirement (broadly, EMI is their main employment or they commit at least 25 hours per week, or 75% of their working time, to the company).
- The unexercised value of that employee's EMI options must not exceed £250,000 over a rolling three-year window.
If any of these tests are breached at or after grant, EMI status can be lost on the options affected. That is a qualifying-company rules issue covered in the sibling guide. The EMI vs unapproved calculator lets you model the tax difference between an EMI grant and an unapproved option.
Valuation and documentation
EMI option grants must be made at an agreed valuation. HMRC Shares and Assets Valuation (SAV) is the HMRC team that agrees valuations before or at grant. Agreeing the valuation with SAV before granting is standard practice and protects against later disputes about the market value used.
The process and requirements are set out in HMRC's EMI guidance. The standalone VAL231 form once used to submit valuation requests is no longer live at its old address, so start the valuation through HMRC SAV or the ERS online service instead.
Alongside the valuation, the company should hold:
- A board resolution approving the option grant.
- An option agreement signed by the company and the employee.
- A record of the option plan rules under which the grant is made.
The EMI option valuation guide covers the valuation process in detail.
Reporting the pool to HMRC
Three reporting obligations apply once a company sets up an option pool using EMI or any other employment-related securities scheme.
- Register the scheme. Before the first grant, the EMI scheme must be registered with HMRC via the Employment Related Securities online service. Registration generates the scheme reference number used in all subsequent returns.
- Notify grants. Each individual EMI option grant must be notified to HMRC. The deadline for grant notification is 6 July following the end of the tax year in which the grant was made. From the 2022/23 tax year onwards, grant notification runs through the same ERS return process as the annual return.
- File the annual ERS return. An annual return must be filed for every registered scheme by 6 July following the tax year end. This applies even if nothing happened in the year: nil returns are required. Missing the return triggers automatic penalties.
All three obligations are governed by HMRC's ERS return guidance. The EMI scheme setup service covers registration, documentation and the first return filing.
When EMI does not fit the pool
Not every company or every grant will qualify for EMI. The most common reasons are exceeding the gross-asset or headcount tests, carrying on an excluded activity, or an individual employee not meeting the working-time requirement. When EMI is not available, two main fallbacks exist.
CSOP: the scale-up fallback
A Company Share Option Plan (CSOP) allows up to £60,000 of options per employee. CSOP has broader company eligibility than EMI (no gross-asset or headcount limit, though excluded-activity and share-class tests apply) and is the standard route for companies that have grown past the EMI thresholds. The tax treatment is less favourable than EMI at exercise, but CSOP remains a tax-advantaged scheme. The EMI vs CSOP guide covers the comparison.
Growth shares and unapproved options
Where neither EMI nor CSOP fits, the company can grant growth shares or unapproved (non-tax-advantaged) options under general employment-related-securities rules. These are taxed as income (and NIC where relevant) on the value acquired above any amount paid, rather than as a capital gain. They are flexible but carry a heavier tax burden for the employee at exercise. The growth shares guide covers the mechanics. For companies issuing shares at funding rounds, the section 431 election guide addresses the restricted-securities rules that often apply alongside growth share grants.
Option pool compliance checklist
| Step | What it involves | Source | Deadline |
|---|---|---|---|
| 1. Reserve the pool | Board resolution setting aside a block of shares (or authorised but unissued share capital) for the option plan. Percentage is a commercial decision for your advisers, not a tax rule. | EMI limits apply to grants from the pool | Before first grant |
| 2. Confirm EMI qualification | Check company tests: gross assets £30m or less, fewer than 250 FTE, no excluded activities, unexercised pool value within £3m. Check each employee meets the working-time test and is within the £250,000 per-employee limit. | gov.uk EMI | Before each grant |
| 3. Agree valuation with HMRC SAV | Submit a valuation to HMRC Shares and Assets Valuation and obtain agreed market value before or at grant. Retain the agreed valuation and all correspondence. | gov.uk EMI | Before or at grant |
| 4. Register the scheme | Register the EMI scheme via the HMRC ERS online service to obtain the scheme reference number. Done once, before the first grant notification. | gov.uk ERS | Before first grant notification |
| 5. Grant options and document | Execute board resolution and option agreement. State the exercise price, vesting schedule and plan rules. Retain signed copies. | gov.uk EMI | Grant date |
| 6. Notify grants to HMRC | Submit EMI grant notification via the ERS online service, covering all grants made in the tax year. | gov.uk ERS | 6 July after the tax year end |
| 7. File annual ERS return | File the annual ERS return via HMRC's online service. File a nil return if nothing happened in the year. Penalties apply for late or missing returns. | gov.uk ERS | 6 July after the tax year end (every year) |
What to do next
Setting up a first pool, or walking into a round where investors are asking about one, the order of play is the same: confirm the company clears the EMI tests, then move to registration and valuation. The EMI qualifying-company guide works through those tests, and the EMI scheme setup service handles registration, the HMRC SAV valuation, grant documentation and the first ERS return in one engagement.
If you are near or past the EMI limits, the EMI vs CSOP guide shows where CSOP takes over; if you are issuing ordinary shares at a round, the section 431 elections guide covers the restricted-securities rules that ride alongside. Founders mapping this across a whole fundraise can start from the pre-seed founders hub or the funded startups hub. This page is general guidance, not personal advice: the right structure turns on your specific facts, so take advice before making grants.