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

📘 Overview

Unapproved share option schemes are non-tax-advantaged share option arrangements that allow companies to grant options to employees, directors, or contractors outside the limits of the EMI scheme.

Despite the name, “unapproved” doesn’t mean “unauthorised” or “non-compliant”, it simply means the scheme is not approved by HMRC for tax relief purposes.

Unapproved schemes are highly flexible and can be useful when EMI options are not available, but they come with less favourable tax treatment.

🏗️ When Are Unapproved Schemes Used?

Unapproved schemes are typically implemented when:

The company doesn’t meet EMI eligibility criteria (for example, due to size, trade type, or location).
The individual doesn’t qualify for EMI, such as non-employees, consultants, or overseas staff.
The company wants to offer options exceeding EMI limits, such as above the £250,000 per employee threshold or £3 million company-wide cap.
There’s a desire to reward senior executives or advisors who are not on payroll.

💡 Unapproved options can also run alongside EMI options to cover individuals who fall outside EMI rules.

💰 How Do They Work?

Like EMI schemes, unapproved share options give recipients the right to buy shares in the future at a set exercise price.

However, the key difference lies in the tax treatment.

Aspect	EMI Scheme	Unapproved Scheme
HMRC Approval	Required	Not required
Eligibility	UK employees meeting strict criteria	Any individual (employee, contractor, advisor)
Tax at Grant	None	None
Tax at Exercise	No Income Tax if exercised at or above market value	Income Tax due on the gain between exercise price and market value
NICs	Usually not payable	Often payable if shares are “readily convertible assets”
CGT Treatment	Entrepreneurs’ Relief possible (10%)	Capital gains may apply on sale after income tax is paid
Company Deduction	Corporation tax relief for gain on exercise	Often available

⚖️ Tax Implications

Unapproved schemes do not offer the tax benefits of EMI. Instead, they follow standard tax rules:

Income Tax is payable on the gain between the exercise price and the market value of the shares at the date of exercise.
National Insurance Contributions (NICs) may apply if the shares are “readily convertible” (for example, during a sale or liquidity event).
Capital Gains Tax (CGT) applies on any future sale of shares, based on the gain from the exercise price to the final sale price.
The employer may receive a corporation tax deduction equal to the employee’s taxable gain.

💡 To manage potential liabilities, some companies agree for the employee to cover employer NICs through their option terms.

🧩 Why Use an Unapproved Scheme?

Even without EMI tax relief, unapproved schemes can still be valuable:

Flexible design: No cap on value, vesting, or participants.
Broader eligibility: Ideal for international teams, advisors, or part-time consultants.
Retention and motivation: Encourages long-term engagement aligned with company growth.
Complementary structure: Can exist alongside EMI schemes to cover ineligible individuals.

🧭 Example Scenario

A UK tech company has already issued EMI options up to the £3 million limit.

The founders now wish to reward a senior advisor and two overseas engineers who are not eligible for EMI.

They create an unapproved share option scheme to grant options to these individuals — accepting less favourable tax treatment in exchange for broader participation and flexibility.

🧾 How Barnes & Scott Can Help

We can assist with every stage of designing and implementing your unapproved option scheme, including:

Reviewing eligibility and alignment with your existing EMI scheme
Drafting tailored option agreements and plan rules
Advising on valuation and tax implications
Supporting reporting and compliance for HMRC and Companies House

💡 Our approach ensures your unapproved scheme is compliant, commercially sound, and aligned with your long-term growth and retention strategy.