What are unapproved share option schemes and when might they be useful?

📘 Overview

Unapproved share option schemes can sound misleading, the word “unapproved” may suggest something unofficial or non-compliant. In reality, these are perfectly legitimate arrangements that allow companies to grant share options outside the limits of tax-advantaged schemes such as the Enterprise Management Incentive (EMI) scheme.

This article explains what unapproved share option schemes are, how they differ from EMI schemes, their tax implications, and when they might be useful for your company.

What Is an Unapproved Share Option Scheme?

An unapproved share option scheme is a type of employee share plan that does not require HMRC approval. There is no need to submit the plan for validation before granting options, and it can therefore be more flexible in structure and eligibility.

Key points:

• No HMRC approval required for the scheme itself.
• No statutory limits on grant size.
• Broader eligibility than EMI (useful where EMI company or employee conditions are not met).

Because there are fewer restrictions, employers can design the scheme to meet specific commercial goals, such as rewarding senior executives, attracting key hires, or recognising performance.

🔍 How Do They Differ from EMI Schemes?

Tax Treatment and Employer Implications

Unapproved share option schemes are not tax-advantaged, so the employee’s gain is taxed as employment income at exercise.

At exercise (employee):

• The spread (market value at exercise minus the exercise price) is subject to income tax.
• PAYE and Class 1 NICs generally apply if the shares are “readily convertible assets” (RCAs), for example where there is a trading arrangement or an immediate sale. If the shares are not RCAs, the income tax charge still arises but may be assessed via self assessment and NICs may not be due.
• Any later gain on sale (after exercise) is subject to capital gains tax (CGT).

For the employer:

• A corporation tax deduction is typically available for the amount equal to the employee’s taxable gain at exercise, subject to the statutory conditions in CTA 2009 Part 12. HMRC’s Business Income Manual confirms the availability of this deduction, and the guidance was updated in July 2025.

✅ When Might an Unapproved Scheme Be Useful?

Despite being less tax-efficient, unapproved schemes can be powerful tools for incentivising and retaining employees, especially when flexibility is a priority.

They can be useful when:

• The company or employees are ineligible for EMI (for example, size, independence, trade, or overseas employees).
• The company wants to grant options above EMI limits.
• You wish to customise performance or vesting terms beyond EMI requirements.
• The business seeks to include non-UK or non-executive employees in a plan.

Barnes & Scott can help your company design, document, and implement an unapproved share option scheme tailored to your needs, while ensuring compliance with ERS reporting and payroll where required.

Summary

Unapproved share option schemes:

• Offer maximum flexibility with no HMRC approval required.
• Are not tax-advantaged, so income tax applies on the exercise gain, with PAYE/NICs where the shares are RCAs.
• Can still deliver meaningful rewards and align employees with company success.
• Remain a valuable alternative where EMI is unavailable, noting the updated EMI notification deadline of 6 July after the tax year for new grants from 6 April 2024.