Employment related securities are shares or securities an employee or director acquires because of their job. Handing shares to your team can look simple, but it often triggers Income Tax, and sometimes National Insurance, on their value. HMRC runs four tax advantaged schemes that soften or remove that charge, alongside common unapproved arrangements. Get the paperwork right, including any section 431 election and the annual return, and you keep the reward without an unwelcome tax bill.

If your company wants to reward staff with equity, you are stepping into the world of employment related securities, known as ERS. The rules sit in Part 7 of the Income Tax (Earnings and Pensions) Act 2003. They are wide reaching, easy to trip over, and they catch far more than obvious share gifts. This guide sets out the basics so you know when a charge arises, which schemes exist, and what you must tell HMRC.

What counts as an employment related security?

A security is broadly a share, a debenture, or a similar financial instrument. It becomes an employment related security when it is acquired by reason of employment, meaning the job is the reason you got it. This is drawn deliberately widely. Shares given to a founder who also works in the business, to a new hire, or to a director all tend to fall inside the rules, even where money changed hands. If the acquisition connects to the employment, treat it as ERS until you can show otherwise.

Why does giving shares create a tax charge?

When an employee acquires shares for less than they are worth, the shortfall is treated as employment income. Income Tax is due on that amount, and where the shares are readily convertible into cash, National Insurance can apply too, collected through payroll. In effect HMRC views cheap or free shares much like any other reward, similar to a taxable perk. If you want to understand how HMRC treats non cash rewards more generally, our guide to benefits in kind and the P11D is a useful companion.

A later sale of the shares is a separate event. Any growth in value from acquisition to disposal is usually a capital gain, taxed under the capital gains tax rates rather than as income. Splitting the income charge from the later capital charge is central to planning any share award well.

What are the four HMRC tax advantaged schemes?

HMRC offers four statutory schemes that give favourable treatment when the conditions are met:

  • Enterprise Management Incentives (EMI): flexible share options aimed at smaller trading companies, widely used by growing businesses.
  • Company Share Option Plan (CSOP): discretionary share options that any company can use, subject to a per employee value cap.
  • Share Incentive Plan (SIP): a plan letting employees hold shares in a trust, with free, partnership, and matching shares available.
  • Save As You Earn (SAYE), also called Sharesave: a savings linked option scheme open to all staff on equal terms.

Each has its own qualifying conditions and its own tax outcomes. Used correctly, they can remove the up front Income Tax charge and convert the reward into capital treatment on sale.

What are the EMI limits?

EMI is the most popular route for smaller companies, so the limits matter. An employee can hold up to £250,000 of qualifying options, measured at grant. Beyond that, the rules changed from 6 April 2026, so the position differs across the two tax years:

  • Company option limit: £3 million of options in total up to 5 April 2026, rising to £6 million from 6 April 2026 (£3 million for certain specified companies).
  • Gross assets: the company must have gross assets of £30 million or less, increased to £120 million from 6 April 2026.
  • Employee numbers: fewer than 250 full time equivalent employees, increased to fewer than 500 from 6 April 2026.

The company must also carry on a qualifying trade. If you are weighing how best to reward directors, our comparison of salary versus dividends in a limited company sets share awards in the wider remuneration picture.

What about unapproved arrangements?

Not every award fits a statutory scheme, and many companies use non tax advantaged, or unapproved, arrangements instead. These are perfectly legal and often the right choice, but they do not carry the reliefs, so the standard ERS charge applies. Where shares carry restrictions, such as conditions that could see them forfeited, the value can be taxed in stages, which complicates matters.

What is a section 431 election?

Restricted shares are common in unapproved deals. A section 431 election lets the employee and employer agree to ignore the restrictions and tax the shares on their full unrestricted value straight away. This is a deliberate choice to pay a little more Income Tax now so that future growth falls under capital gains rules rather than income. The election must be made within 14 days of acquiring the shares. Miss that window and the option is gone, so it is one of the most time sensitive tasks in any share deal.

What must the employer report to HMRC?

If you operate any share scheme, tax advantaged or not, you must register it with HMRC online. You then file an annual ERS return, or a nil return where nothing happened, by 6 July following the end of the tax year. Late or missing returns attract automatic penalties, so the deadline is firm. Registration itself should be done by 6 July following the tax year in which the scheme was set up. For a wider view of your company obligations, see our accountancy and tax guide.

Getting the detail right

Share schemes reward the people who build your business, but the tax and reporting rules are unforgiving, and a single missed election or late return can prove costly. Working with an accountant who knows ERS inside out is money well spent. Solar Protect tax investigation insurance covers up to £100,000 of your accountant’s fees with no excess, so if HMRC opens an enquiry into your share arrangements, the cost of defending it is taken care of. Get a quote.

Reviewed by Matthew Bartlett, Director, Solar Protect. This guide is general information, not personalised tax or financial advice. Figures are correct for the 2025/26 and 2026/27 UK tax years at the time of writing.