Where the company and the employee both qualify, Enterprise Management Incentive options usually beat growth shares: there is no tax when the option is granted, no Income Tax when it is exercised at the agreed market value, HMRC will agree that value in advance, and the shares can attract Business Asset Disposal Relief without a 5% holding. Growth shares suit people and companies that fall outside EMI, or where the employee wants real shares with votes or dividends now, but the employee pays or is taxed on the value upfront, nobody at HMRC agrees that value beforehand, and relief on a sale needs the usual 5% test.
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How do the two arrangements differ?
An EMI option is a right to buy shares later at a price fixed now, normally the market value at grant. Until exercise the employee owns nothing: no votes, no dividends, and nothing to lose except the option. Many EMI schemes only allow exercise on a sale.
A growth share is an actual share, usually a separate class, whose rights only bite on value above a hurdle set at or above the company’s current value. Because the existing value belongs to the other shareholders, the share is worth little when issued. There is no special regime; the ordinary employment related securities rules apply. The mechanics are explained in our page on growth shares; this page is about choosing between the two.
Who can use each one?
EMI has eligibility conditions. For options granted from 6 April 2026 the company must have gross assets of £120 million or less and fewer than 500 full time employees, and unexercised EMI options across the company must not exceed £6 million; before that date the limits were £30 million, 250 employees and £3 million. Each employee can hold options worth up to £250,000, measured at grant, and must work at least 25 hours a week or 75% of their working time for the company. Companies in excluded activities such as banking, farming, property development and legal services cannot use EMI, and the higher limits do not apply to a company with its registered office in Northern Ireland that trades in goods or electricity.
Growth shares have none of these limits. They can go to a non executive director, a part time employee, someone in a subsidiary of a large group, or an employee who has already used the £250,000 EMI limit. That flexibility is the main reason they are used.
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What tax is due at the start?
Granting an EMI option is not a taxable event. Section 530 ITEPA 2003 removes the Income Tax charge on exercise where the option price is not less than the market value of the shares when the option was granted. If the option was granted at a discount, Income Tax is due on the discount when the option is exercised, and National Insurance only if the shares are readily convertible assets.
With growth shares the tax point is the acquisition. If the employee pays less than market value, the shortfall is employment income. Leaver provisions usually make the shares restricted securities, so the employee and employer normally sign a joint election under section 431 ITEPA 2003, which must be made no more than 14 days after the acquisition. The election taxes the full unrestricted value now so that later growth falls within Capital Gains Tax. See section 431 elections.
Who agrees the valuation?
For EMI, HMRC’s Shares and Assets Valuation team will agree the market value before grant on form VAL231, and the agreed value lasts 90 days. The company proposes both the unrestricted market value and, where the shares carry restrictions, the actual market value.
No equivalent check exists for a growth share issue. HMRC says SAV does not give post transaction valuation checks for Income Tax (Earnings and Pensions) Act purposes, so the hurdle valuation is tested only if HMRC enquires, possibly years later. If the shares were worth more than the employee paid, the difference is taxed as earnings, and if the shares are readily convertible assets PAYE and National Insurance should have been operated. Our page on valuing shares for employee schemes covers the method.
What about dividends and votes?
An option holder gets neither until exercise. If the business is meant to pay out profits to staff along the way, EMI does not do that without early exercise.
Growth shares carry whatever rights the articles give them. Some have votes and a share of dividends above the hurdle; many have no votes and no dividends until a sale, which keeps their value low at issue. Dividends received are taxed as dividend income: for 2026 to 2027, above the £500 allowance, at 10.75%, 35.75% or 39.35% depending on the band. Generous dividend rights increase the value at issue and therefore the upfront tax, so the two cannot be designed separately.
What happens when the company is sold?
EMI holders usually exercise on the sale, pay the option price out of the proceeds and sell at once. If the option was granted at market value and there has been no disqualifying event, or the option is exercised within 90 days of one, there is no Income Tax. The gain over the exercise price is subject to Capital Gains Tax, and Business Asset Disposal Relief applies where the shares were acquired after 5 April 2013 and the option was granted at least two years before the sale, with no need for a 5% holding. The BADR rate is 18% for disposals from 6 April 2026. See BADR on EMI shares.
Growth shareholders already own their shares, so the whole gain above the amount paid and taxed at issue is a capital gain. BADR is available only if the company has been the employee’s personal company for two years, broadly at least 5% of the shares and votes plus 5% of profits and assets or of sale proceeds. Most staff growth holdings are smaller, so gains are taxed at 18% or 24%, after the £3,000 annual exempt amount for 2026 to 2027.
There is also a corporation tax angle. Under section 1018 CTA 2009 the company’s deduction is the market value of the shares when acquired less what the employee paid. On an EMI exercise at sale value that deduction can be large; for growth shares bought at full value it is small or nil. See corporation tax relief for employee shares.
How do the numbers compare?
Illustration only. A company worth £2 million wants to give a key employee, a higher rate taxpayer, 2% of future growth. It is sold three years later for £12 million.
| EMI options over 2% | Growth shares, 2% above a £2m hurdle | |
|---|---|---|
| Paid by employee | £30,000 exercise price on sale | £4,000 at issue |
| Proceeds | £240,000 | £200,000 |
| Gain | £210,000 | £196,000 |
| Rate | 18% BADR | 24%, no BADR |
| CGT after £3,000 exemption | £37,260 | £46,320 |
| Kept after tax and price | £172,740 | £149,680 |
The EMI holder shares in the existing £2 million of value too, which is why the exercise price is set at today’s value. The growth shareholder bears the risk that HMRC later argues £4,000 was too low.
What mistakes come up most often?
- Choosing growth shares for an employee who qualifies for EMI, giving up advance valuation and BADR without the 5% test.
- Missing the 14 day window for a section 431 election on growth shares.
- Missing EMI notification: options granted from 6 April 2024 must be notified by 6 July after the end of the tax year of grant. HMRC has published draft legislation to fold this into the annual return for options granted from 6 April 2027.
- Forgetting that growth share issues are reportable on the employment related securities return by 6 July after the tax year.
- Giving growth shares rich dividend or voting rights without reflecting them in the valuation.
Comparisons with other approved schemes are on our pages on EMI or CSOP.
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Related Accountapedia entries
- Accounting for EMI options
- BADR on shares from EMI options
- Accounting for growth shares
- Growth shares for employees
- EMI Share Options Explained
Sources
- GOV.UK: Submit an enterprise management incentives emi notification
- GOV.UK: Expanding the eligibility limits of the enterprise management incentiv
- GOV.UK: www.gov.uk
- GOV.UK: Tax employee share schemes
- legislation.gov.uk: Act 2003 c. 1, section 530
- GOV.UK: How employment related securities work if youre an employer
- legislation.gov.uk: Act 2003 c. 1, section 431
- GOV.UK: Get a share scheme valuation from hmrc
- GOV.UK: Shares and assets valuations for tax
- GOV.UK: Tax on dividends
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.