Ever heard of the phrase “golden handcuffs”? Many early employees would have done so. Perhaps not the exact phrase but they’d definitely known what it means. As per Google and I write the exact description (AI and all) which seems to convey the meaning well here.
“Golden handcuffs” refer to financial incentives designed by employers to retain top talent and discourage key employees from leaving for competitors. These perks such as deferred bonuses, stock options, or generous pensions are usually tied to a vesting schedule, meaning the employee must forfeit them if they quit prematurely.
There you are! It sounds so great. In my time working with start-ups, I’ve had a fair share of ESOPs being offered for early stage advice or hands-on work. The ones I have stuck with have been a rich source of education for me and in some cases, financially rewarding. Many start-up founders think of this with the right amount of heart – they want to retain experienced top tier talent without the downside of a large pay cheque draining cash resources.
But there is a downside people often think about. Well – is it worth anything if I leave the company before anything converts? This is a fair ask and one most companies think of as understood. It’s a very risk-reward thing, like founders, many early employees stay for the story they can one day be part of. Unlike founders, usually an ESOP or an incentive plan is an add-on to compensation perhaps below market rates but still enough to carry on having a day job while embracing entrepreneurial flavour to the work you do.
The companies who do it well, do so properly – conversations are had, documentation is put together and intentions are clear. We hope to dispel some myths with this article on what ESOPs mean in the UK – corporate and tax wise.
Are ESOPS the only way to reward early employees?
Whilst this is the most popular way, this is by no means the be all and end all of executive compensation. Think about other things you can do which doesn’t come with the rigour of putting a formal scheme in place.
- Would flexible working options help? Maybe employees with a second job or a young family will prefer having a paid job while taking time to spend with the family or on another part time job
- How about a profit share model? You can think of offering employees a bonus which is a percentage of profits made by the company at the end of year or when an employee completes a year of work (or more)?
If ESOPS really are the way to go, where do I start?
For the sake of simplicity, we will keep this article to ESOPs – approved schemes. Also for simplicity, we will be using options and shares somewhat interchangeably. You will be able to figure out what we are trying to say when you read through.
ESOP (an Employee Stock Option Plan) is created from the existing share capital of the company and allocated in periodic intervals to key employees identified. This process is called vesting. You don’t get all the options set aside for you at all once.
Say you are allocated 3,000 options with a 3-year vesting period. This means you will be getting 1,000 shares each year you complete with the Company. Different start-ups deal with this uniquely. The common method is for them to vest over the period and eventually “convert” at the point of a sale or exit, i.e. you will remain an option holder until the company has an exit event and can then formally convert the options to shares if you have remained employed in the company during the time.
What is an exit event?
An exit event is usually clearly defined in your ESOP documentation. Generally it is the sale of a start-up to a larger enterprise which sees current owners and option holders being paid value for their shares.
Among the most recent examples, Anthropic and OpenAI have both given employees equity upside and both have shown a route to cashing out that isn’t the classic sale. Rather than waiting for an acquisition or a listing, both companies ran secondary sales that let existing employees sell some of their shares to incoming investors while the company stayed private and they stayed employed. When Anthropic ran its tender offer in early 2026, some employees took the money off the table, while a notable number chose to hold, betting the shares would be worth more down the line. Both companies have since filed to go public, which would open up another, larger route to liquidity when they list.
This is also the biggest bone people usually have to pick with the scheme and we’d like our readers to go in with eyes open. ESOPs carry a certain risk, most people are aware of this. Hence the reason why they are a popular instrument for early start-up employees. When a start-up scales up and exits, the option holders benefit like everyone else, sometimes this is life changing money and sometimes a good few months of income. However, there is every chance that the options may never convert.
Taking a close look at the HMRC approved UK share schemes
Not every company offers these. But if you are an employer thinking, or an employee trying to make sense of what your company is offering, this section is worth reading properly.
For employers, these schemes are some of the most tax-efficient tools available for rewarding the people who are building your business. For employees, the decisions around when to exercise and whether the risk seems worthwhile is worth thinking about and discussing (when possible) with an Accountant. Most people who are enrolled in one signed something during onboarding and then quietly forgot about it. That is understandable. But it can also be expensive. We’ll look through some things that an employee should consider
Picture a technology business. Fifteen people. Growing fast. The founder has just lost a brilliant developer to a larger company that offered equity. She cannot match the salary. But she can offer something potentially more valuable: a piece of her own company, while money is attractive, a sense of ownership is a big incentive for many people.
This is where EMI (Enterprise Management Incentives) comes in.
What it is. Employees receive options. Options are the right to buy shares in the future at a price typically when the company valuation is low.. If the company grows, they buy at the original lower price and benefit from the difference.
How it qualifies. The company must have fewer than 250 employees and gross assets under £30 million. Each employee can hold options worth up to £250,000 over any three year period. To be eligible, an employee must work at least 25 hours a week for the company, or if they work fewer hours overall, at least 75% of their total working time must be with that company. Options must be granted at or above the current market value, agreed with HMRC and registered within 92 days of grant or they lose their EMI status. Tax and Employee Share Schemes
Tax for employees. No income tax or NIC on grant No income tax or NIC on exercise If the options are granted at market rates. Capital gains tax when shares are sold. EMI qualifies for Business Asset Disposal Relief, meaning a reduced CGT rate of 14% in 2025-26 and 18% from April 2026, significantly lower than standard income tax rates on employment income upto caps available, currently up to a £1m lifetime limit per person.
Tax for employers. The employing company gets a corporation tax (CT) deduction if qualifying shares are acquired by employees upon the exercise of an EMI option. The CT deduction matches the difference between the market value when the shares are acquired and the amount that the employee pays for them. Where the option is to acquire shares at their market value at the time of the grant of the option, the CT deduction is equal to the amount that would have been chargeable to tax but for the EMI relief. Where EMI options were granted at a discount, CT relief is given for both the amount of the discount and the amount that would have been charged to tax but for the EMI relief. Employee Tax Advantaged Share Scheme User Manual
For employers to keep in mind.
- It’s a good idea to get a valuation agreed with HMRC before granting. Review and where needed take specific advice regularly as the company grows.
- Provisions regarding what happens when people leave the company is important and should be clear to everyone. Submit an Enterprise Management Incentives (EMI) notification
EMI works brilliantly for growing businesses.
But what happens when that business keeps growing? A step up from the EMI scheme is the Company Share Option Plan (CSOP) works in a similar way to EMI but is available to larger companies with no employee or asset size limit. It is most commonly seen in UK listed companies, though private companies that have outgrown EMI eligibility use it too.
How it qualifies. Options must be granted at market value. The individual limit is £60,000 worth of options per employee at grant.
Tax for employees. No income tax or NIC on grant. No income tax or NIC on exercise, provided the option is exercised between three and ten years after grant. CGT applies when the shares are sold.
Tax for employers. No employer NIC on exercise. Corporation tax deduction available on exercise.
For employers to keep in mind. CSOP is less flexible than EMI and the individual limit is lower. For businesses that genuinely cannot use EMI, it is the natural alternative. But the administrative requirements are real and the scheme needs to be set up and maintained correctly to protect the tax advantages.
When done right, ESOPs can motivate employees to approach their job differently. As was researched and found, employees often have a mindset shift and can identify themselves with company goals when they feel a sense of ownership.
If you are thinking of putting ESOPs in place for employees, it is important to speak to your accountant or tax advisor. If you need guidance, please refer to HMRC’s written guides or if that’s proving a task, drop us a line and we will do our best to help.
We are Evalua8 and we specialise in making life easier for founders and busy CEOs with the numbers that make a difference to their business.
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