Share schemes: An overview for employees

Employee Share SchemesCopy link

Share incentives can deliver material value, but the tax treatment, the impact on adjusted net income (ANI) and the knock-on effect on pension allowances vary wildly between plans. The sections below focus on the UK perspective (with nods to US-headquartered employers that run global plans).

Tax advantaged share schemesCopy link

Share Incentive Plans (SIPs)Copy link

SIPs let employees acquire employer shares via a trust, mixing free shares (up to £3,600 a year), partnership shares bought via salary sacrifice, matching shares that mirror partnership purchases, and dividend shares that reinvest payouts.

• When used: Most common in large UK PLCs or established private companies with stable share prices because the trust administration cost is meaningful.
• Income and ANI: Partnership shares reduce gross pay before PAYE, so ANI falls immediately. Free/matching/dividend shares are income-tax-free if left in the plan for 5 years; withdrawing earlier adds the market value to income (and ANI) for that tax year.
• Pension AA: Salary sacrifice lowers contractual pay. Personal pension contributions are capped at 100% of relevant earnings, so aggressive sacrifice could cap tax-relieved SIPP/SIPP contributions and reduce employer percentage-based contributions.
• Key caveats: Post-sacrifice cash salary must remain above the NMW and cover other sacrifice arrangements. Leaving the company or removing shares within 5 years triggers PAYE and possibly NICs.

Save As You Earn (SAYE)Copy link

SAYE links a tax-approved savings contract (3 or 5 years) to a share option set at a discount of up to 20%.

• When used: FTSE and AIM constituents favour SAYE because employees like the capital-protected savings plus option upside.
• Income and ANI: Savings come from net pay, so they do not reduce taxable income or ANI. Exercising a qualifying SAYE option does not generate income tax; gains are typically subject to CGT only when the shares are sold.
• Pension AA: Because savings come from net pay, they do not count toward pension inputs, but they also do not create new headroom. Ending the contract early refunds cash, which can still be paid into a pension separately if annual allowance and relevant earnings permit.
• Key caveats: Missing more than 12 contributions usually cancels the option. Even though deductions are from net pay, employers still ensure that cash salary after deductions exceeds NMW and any contractual minimums.

Company Share Option Plans (CSOP)Copy link

CSOPs let employers grant up to £60,000 of options per employee at market value.

• When used: Favoured by larger private companies that are too big for EMI but still want approved tax treatment, and by UK subsidiaries of multinationals that want a UK-compliant overlay.
• Income and ANI: Hold the option for 3 years and exercise at or above the HMRC-agreed market value to avoid income tax/NIC. Break those conditions and the spread becomes PAYE income, boosting ANI in that tax year.
• Pension AA: Exercise gains can push adjusted income over £260,000, triggering the tapered annual allowance, but CSOP participation does not itself consume allowance.
• Key caveats: HMRC valuation agreement is essential. Corporate actions or leaving the business early can truncate the tax advantages.

Enterprise Management Incentives (EMIs)Copy link

EMI options target UK high-growth companies.

• When used: Startups and scale-ups with <250 employees and <£30m gross assets; common in tech, life sciences and services.
• Income and ANI: If the exercise price is set at market value at grant (or income tax is paid on any discount up front), the gain on exercise/sale is liable to CGT rather than income tax, often qualifying for Business Asset Disposal Relief. Only disqualifying events (e.g. leaving after 90 days, changing trade) or discounted grants create PAYE income, raising ANI accordingly.
• Pension AA: Gains realised on exit are not pension contributions, so they do not use the annual allowance, but a large sale can lift adjusted income above the taper thresholds in that year. Employees planning big pension contributions may want to complete them before an exit crystallises.
• Key caveats: Employees must spend at least 25 hours a week or 75% of their working time with the company. Options usually lapse 90 days after leaving. EMI cannot replace cash salary—employers must still meet contractual pay and NMW.

Acquisition schemes and global plansCopy link

Acquisition or pure equity plans dominate in multinationals where UK tax-advantaged schemes are impractical. Awards sit outside HMRC-approved wrappers, so most value is taxed as employment income. That can push ANI above key thresholds (£60k for High Income Child Benefit Charge and £100k for personal allowance withdrawal) and can taper the pension annual allowance when adjusted income exceeds £260k.

Restricted Stock Units (RSUs)Copy link

• When used: Standard for US-listed tech, pharma and finance firms operating globally; grants often settle in listed stock.
• Income and ANI: Shares vest on a timetable and the market value on the vest date is taxed through payroll as salary, increasing ANI immediately. Employers commonly sell-to-cover or cash-settle part of the award to fund PAYE/NIC.
• Pension AA: RSU income can push adjusted income over the tapered AA thresholds. Vesting does not count as a pension input, so it cannot help you fill unused allowance.
• Key caveats: Vestings while on leave or after moving country can create multi-jurisdiction filings. You cannot salary-sacrifice RSUs without bespoke arrangements, so they do not reduce ANI proactively.

Performance Share Units (PSUs)Copy link

• When used: Listed companies that want equity to follow revenue, EBIT or TSR targets.
• Income and ANI: Taxed in the same way as RSUs but only after the remuneration committee certifies performance. Large one-off vestings can push ANI into taper territory.
• Pension AA: Identical to RSUs—no pension input, but higher ANI can erode allowance.
• Key caveats: Because PSUs can be cancelled late, employees should not rely on them for cash-flow planning. Clawback clauses can require repayment after misconduct findings.

Share option schemes outside EMI/CSOPCopy link

Many private or US-headquartered employers issue options that do not qualify for UK tax advantages.

Non-EMI Share OptionsCopy link

• When used: Pre-IPO companies that have outgrown EMI or overseas parents offering a single global plan.
• Income and ANI: When you exercise, the difference between the option price and market value is treated as employment income, so PAYE/NIC apply and ANI jumps in that tax year. Subsequent share growth is subject to CGT once you sell.
• Pension AA: The income spike can trigger the tapered AA or the £4,000 Money Purchase Annual Allowance if you have already flexibly accessed pensions. Because the gain is not a pension contribution, it does not help use carry-forward.
• Key caveats: You need cash (or a broker-assisted sell) to pay PAYE/NIC at exercise, even if the shares remain illiquid. If options were granted alongside salary reductions, ensure your remaining cash salary is still above NMW and pension scheme minimums.

Practical checkpointsCopy link

• Track when different awards hit PAYE because ANI-driven cliffs (child benefit, personal allowance, tapered AA) are triggered by timing, not by headline salary.
• Salary sacrifice into shares (SIP partnership shares or any bespoke plan) must never take contractual cash pay below NMW or jeopardise statutory payments (maternity, sick pay).
• Keep grant agreements, HMRC valuation letters and vesting statements—your self assessment relies on them, and HMRC can ask for justification years later.
• Consider spreading exercises/vestings over tax years if liquidity allows, so you stay within personal allowance, child benefit and AA thresholds.

Common WrappersCopy link