Share Schemes UK: CSOP, Growth Shares and Unapproved Options

Share scheme advice when EMI does not fit: CSOP, growth shares and unapproved options.

Not every company qualifies for <a href="/services/emi-scheme-setup">EMI</a>, and not every equity award takes option form. When a company exceeds the <a href="https://www.gov.uk/tax-employee-share-schemes/enterprise-management-incentives-emis">£30m gross assets or 250-FTE limits</a>, or carries on excluded activities, or an employee breaches the working-time requirement, the EMI route closes. The alternatives each carry different tax treatment and different design constraints. <a href="https://www.gov.uk/tax-employee-share-schemes/company-share-option-plan">CSOP</a> is the tax-advantaged fallback at up to £60,000 of options per employee: no qualifying-company conditions as strict as EMI, but a lower per-person ceiling. Growth shares and unapproved options fall under <a href="https://www.gov.uk/hmrc-internal-manuals/employment-related-securities/ersm30450">general employment-related-securities rules</a>: income tax, and NIC where relevant, on the value acquired above any amount paid. Choosing the right structure depends on the company's stage, the target exit valuation, and the tax consequences for the participants. All of these structures also carry <a href="https://www.gov.uk/guidance/submit-your-employment-related-securities-ers-return">annual ERS return obligations</a> by 6 July.

The challenges clients face.

Assuming EMI is available when the company has already breached a limit or test

Companies that have raised significant funding, grown their team, or moved into adjacent activities may have crossed the <a href="https://www.gov.uk/tax-employee-share-schemes/enterprise-management-incentives-emis">EMI qualifying thresholds</a> without realising it. A company with gross assets above £30m or more than 250 FTE cannot grant qualifying EMI options. Granting options under the assumption of EMI eligibility when the tests have been breached results in non-qualifying grants, with income tax on exercise rather than CGT at exit.

Not knowing that CSOP is the tax-advantaged fallback once EMI is off the table

<a href="https://www.gov.uk/tax-employee-share-schemes/company-share-option-plan">CSOP allows up to £60,000 of options per employee</a> and does not have qualifying-company conditions as restrictive as EMI. It is the standard fallback for companies that have outgrown EMI. CSOP options are granted at market value and, if held for three years, are exercised free of income tax and NIC, with CGT on the disposal. Many scale-ups move from EMI to CSOP without a structured transition.

Using growth shares or unapproved options without understanding the ERS tax treatment

Growth shares and unapproved options fall under <a href="https://www.gov.uk/hmrc-internal-manuals/employment-related-securities/ersm30450">general employment-related-securities rules</a>: income tax, and NIC where relevant, arises on the value acquired above any amount paid. There is no special CGT rate at exercise as there is for EMI. Growth shares set a participation threshold at grant so that value above the threshold is CGT at exit rather than income at grant, but the threshold must be correctly set. Unapproved options create an income tax charge on exercise on the spread between market value and exercise price.

Founders acquiring restricted securities without the section 431 election

Most startup shares carry restrictions: pre-emption rights, drag-along provisions, vesting schedules. These make shares restricted securities under the ERS rules. A <a href="https://www.gov.uk/hmrc-internal-manuals/employment-related-securities/ersm30450">section 431 joint election</a> must be made within 14 days of acquiring the shares to be taxed on the unrestricted market value up front and avoid income tax later if restrictions are lifted. Missing this window is one of the most common and most costly errors in funded-startup equity award practice.

How we help.

Eligibility diagnosis and alternative structure selection

We assess why EMI does not fit (which limit or test is breached) and identify the right alternative: <a href="https://www.gov.uk/tax-employee-share-schemes/company-share-option-plan">CSOP</a> as the £60,000 tax-advantaged fallback, growth shares designed with the right participation threshold, or unapproved options where no qualifying-company conditions apply. We model the tax consequences of each structure for the participants at realistic exit valuations so the comparison is on substance, not just on the structure name.

CSOP and growth-share setup and documentation

We set up a <a href="https://www.gov.uk/tax-employee-share-schemes/company-share-option-plan">CSOP</a> where it is the right fallback, coordinate the valuation with HMRC Shares and Assets Valuation where appropriate, and prepare the option agreement. For growth shares, we advise on the participation threshold, coordinate the valuation, and prepare the documentation for the new share class. We flag the income tax risk if a growth-share threshold is set too low against current market value.

Section 431 elections and ERS return management across all scheme types

We identify all restricted-securities awards requiring a <a href="https://www.gov.uk/hmrc-internal-manuals/employment-related-securities/ersm30450">section 431 election</a> and prepare and file the election within the 14-day window. We register all scheme types with HMRC and file <a href="https://www.gov.uk/guidance/submit-your-employment-related-securities-ers-return">annual ERS returns by 6 July</a> for every arrangement, including nil returns where no events occurred.

Common questions

What do we use if we cannot grant EMI options?

The right alternative depends on why EMI is unavailable. If the company has crossed the gross-assets or FTE limits, <a href="https://www.gov.uk/tax-employee-share-schemes/company-share-option-plan">CSOP at £60,000 per employee</a> is the standard tax-advantaged fallback. If the company carries on excluded activities or the employee cannot meet the working-time test, growth shares or unapproved options may be more appropriate. Each has different tax treatment and we assess the right structure against the company's specific facts.

How much can each employee get under a CSOP?

<a href="https://www.gov.uk/tax-employee-share-schemes/company-share-option-plan">CSOP allows up to £60,000 of options per employee</a>, measured at the market value at the date of grant. CSOP options granted at market value and held for three years can be exercised free of income tax and NIC. The gain from exercise to disposal is subject to CGT. The £60,000 limit is per employee and is not reduced by any EMI options previously held.

How are growth shares and unapproved options taxed?

Both fall under <a href="https://www.gov.uk/hmrc-internal-manuals/employment-related-securities/ersm30450">general employment-related-securities rules</a>. For unapproved options, income tax and NIC arise at exercise on the difference between the market value at exercise and the exercise price. For growth shares, the value at grant should be low because the shares only participate in growth above the threshold; any value at grant is an employment income receipt. Gains above the threshold from grant to exit are CGT. There is no special CGT rate comparable to EMI's BADR treatment.

When do we need a section 431 election?

Whenever founders or employees acquire shares that are restricted securities, which in practice means most startup shares (pre-emption rights, drag-along, vesting). A <a href="https://www.gov.uk/hmrc-internal-manuals/employment-related-securities/ersm30450">section 431 joint election</a> must be made within 14 days of acquisition. Without it, income tax can arise later if restrictions are lifted or shares are forfeited and reissued at different values. With the election, tax is charged on the full unrestricted market value at grant but no further income tax arises on subsequent value changes.