Hiring great people is one of the hardest challenges for an early-stage startup. UK founders often combine salary with share options, direct share awards, bonuses, commissions and other incentives.
Equity can recruit and retain talent, but the wrong structure can cause unexpected tax, dilution, cap-table errors, HMRC reporting issues and fundraising complications. EMI is important, but it is not the only choice.
Key Takeaways
- Shares create ownership; options normally create a right to acquire shares later.
- EMI is a major UK tax-advantaged option regime.
- General EMI limits increased from 6 April 2026.
- The individual EMI option limit remains £250,000, subject to detailed rules.
- EMI employees generally work 25 hours weekly or 75% of their working time.
- A section 431 election generally must be made within 14 days.
- Use UK HMRC valuation processes rather than importing US 409A.
- ERS reporting and share-based payment accounting can apply.
Common Startup Incentives
| Method | Typical recipient | Dilution | Typical use |
|---|---|---|---|
| EMI options | Qualifying employees/directors | On exercise | Long-term retention |
| Non-tax-advantaged options | Employees / others | On exercise | Flexible incentive |
| Direct shares | Founders / early employees | Immediate | Early ownership |
| CSOP options | Eligible employees | On exercise | Tax-advantaged alternative |
| RSUs | Later-stage employees | Ultimately | Later-stage compensation |
| Phantom equity | Key employees | No actual shares | Economic upside |
| Bonus / commission | Employees / sales | No | Measurable KPIs |
The right mix depends on stage, role, share value, tax, expected exit and dilution.
Shares vs Share Options
Direct shares
The employee acquires ownership, potentially with voting, dividend and exit rights. Issued ownership changes immediately.
Share options
An option normally gives a future right to acquire shares, subject to vesting, exercise price, employment, performance, exit and leaver rules.
| Feature | Direct shares | Options |
|---|---|---|
| Ownership at acquisition/grant | Yes | No |
| Voting rights | Depends on rights | Usually after exercise |
| Exercise required | No | Usually |
| Immediate dilution | Yes | No |
| Future dilution | Already reflected | Yes |
What Is EMI?
Enterprise Management Incentives is a UK tax-advantaged employee option regime. A qualifying employee receives a right to acquire shares later at an agreed exercise price, potentially with more favourable tax treatment than an ordinary option.
EMI Limits From 6 April 2026
| Condition | General limit |
|---|---|
| Gross assets | £120 million or less |
| Employees | Fewer than 500 full-time employees |
| Total company qualifying options | £6 million |
| Individual employee | £250,000 at grant, subject to rules |
| Qualifying exercise period | 15 years for relevant new options |
These expanded limits allow many scaling UK companies to remain eligible longer.
Who Can Receive EMI Options?
A qualifying employee generally works at least 25 hours per week, or at least 75% of total working time if less. Both company and individual must qualify. Certain activities, including some banking, farming, property development, legal services and shipbuilding activities, are excluded.
EMI Alternatives
Non-tax-advantaged options
These can suit companies or recipients outside EMI conditions. They are not invalid; they simply lack EMI's statutory advantages.
CSOP
A Company Share Option Plan is another tax-advantaged arrangement. The current individual limit is £60,000 and it may be useful where EMI is unavailable.
Direct Shares and Section 431 Elections
Founders and early employees may acquire restricted shares, such as shares forfeitable under four-year vesting. Restrictions can reduce initial taxable value and create later employment income charges.
A joint section 431 election can disapply some or all restricted-securities provisions by using unrestricted market value. It generally must be made within 14 days of acquisition.
| UK section 431 | US section 83(b) | |
|---|---|---|
| Jurisdiction | United Kingdom | United States |
| Context | Employment-related restricted securities | Property transferred for services |
| Parties | Employer and employee jointly | US taxpayer |
| Deadline | Generally 14 days | 30 days |
US 83(b) documents are not a substitute for UK restricted-securities analysis.
Why Share Valuation Matters
Valuation affects EMI limits, option pricing, tax, employee economics and due diligence. HMRC Shares and Assets Valuation can agree an EMI valuation before grant.
AMV is Actual Market Value with restrictions; UMV is Unrestricted Market Value. HMRC uses UMV for the EMI individual limit. US 409A is not the UK answer.
Exercise Price and Vesting
For qualifying EMI options, exercise may avoid Income Tax and National Insurance where conditions are met and the employee pays at least grant-date market value. Discounted grants can differ; Capital Gains Tax may arise on disposal.
A common commercial schedule is four-year vesting with a one-year cliff. Documents should cover grant date, vesting, exercise price, conditions, leavers, exit and expiry.
Example: Early Engineer
A software startup grants an engineer 40,000 EMI options at £0.25 per share, matching agreed market value. Exercise would cost £10,000. The engineer owns no shares at grant: options are granted, vest over time, are exercised later, and only then become shares.
- options granted
- options vested
- options exercised
- options cancelled
- shares issued or transferred
Equity Is Not Always the Best Incentive
Equity is not free: grants dilute founders, employees and investors. Commission or bonuses may better motivate roles with measurable results.
| Role | Potential incentive mix |
|---|---|
| Founders | Shares + salary |
| Early engineers | Salary + meaningful options |
| Product leadership | Salary + options |
| Sales | Base + commission + modest equity |
| Marketing | Salary + performance bonus + possible equity |
| Operations | Salary + potentially modest options |
RSUs are more common in mature companies where option exercise prices are high or liquidity is more foreseeable.
Option Pools and Cap Tables
An option pool reserves equity for incentive grants. Track total pool, granted, vested, exercised, cancelled, unallocated and fully diluted ownership.
The issued cap table shows actual shares. A fully diluted model may add outstanding options, the remaining pool, warrants, SAFEs, ASAs and Convertible Loan Notes. Potential ownership is not current legal ownership.
ERS and EMI Reporting
Employment Related Securities schemes generally require annual returns by 6 July after the tax year, including nil returns where required. Relevant EMI options granted from 6 April 2024 through 5 April 2027 currently require notification by the following 6 July. The separate grant notification is due to be removed for grants from 6 April 2027; annual ERS reporting remains separate.
When options are exercised, cash, shares, the cap table, register of members, tax and payroll may all change. New allotments generally require SH01 within one month.
Accounting for Employee Equity
FRS 102 Section 26 can require a share-based payment expense even when no cash compensation is paid. Treatment depends on settlement type, fair value, vesting, conditions, modifications, cancellations and forfeitures.
Cap-table impact ≠ cash impact ≠ accounting expense.
Common Founder Mistakes
| Mistake | Consequence |
|---|---|
| Calling every award shares | Incorrect ownership records |
| Promising EMI before eligibility checks | Employee tax problems |
| No valuation analysis | Tax and due diligence issues |
| Treating 409A as UK valuation | Incorrect assumptions |
| Missing section 431 deadline | Election may be unavailable |
| Giving consultants EMI without checks | Invalid EMI assumptions |
| Missing ERS or EMI reports | HMRC penalties |
| No vesting | Excessive retained equity |
| No option register | Cap-table discrepancies |
| Missing SH01 | Companies House issue |
| Ignoring FRS 102 | Incorrect statements |
| Verbal equity promises | Legal disputes |
Practical Recommendations
Establish an equity plan before repeated grants.
Confirm company and employee EMI eligibility.
Obtain an appropriate HMRC share valuation.
Consider section 431 before restricted shares are issued.
Use vesting and maintain an option register.
Maintain issued and fully diluted cap tables.
Track the 6 July ERS deadline.
Keep approvals and exercise records organised.
Review share-based payment accounting.
How Agbis Helps
Free 30-Minute UK Startup Finance Review
We help startups organise the financial and accounting side of employee equity.
- EMI accounting readiness
- Option registers
- Cap table reconciliations
- Fully diluted schedules
- Share-based payment accounting
- ERS reporting readiness
- Exercise reconciliations
- Fundraising due diligence
Frequently Asked Questions
What is EMI?+
Enterprise Management Incentives is a UK tax-advantaged employee share option regime for qualifying companies and employees.
What are the EMI limits from April 2026?+
From 6 April 2026, the general gross-assets limit is £120 million, the employee threshold is fewer than 500 full-time employees and the company qualifying-option limit is £6 million. The individual limit remains £250,000, subject to detailed rules.
Can contractors receive EMI options?+
EMI is an employee regime. A consultant who is not an employee cannot simply be assumed to qualify; another option or incentive may be appropriate.
What is a section 431 election?+
It is a joint employer and employee election concerning restricted employment-related securities. It generally must be made within 14 days of acquiring the shares.
Is section 431 the UK equivalent of an 83(b) election?+
They address conceptually similar restricted-share issues but are different elections under different laws. Section 431 generally has a 14-day deadline; US 83(b) has 30 days.
Does an employee become a shareholder when options are granted?+
No. An option normally gives a right to acquire shares later. Shareholder status generally begins after exercise and acquisition.
Does my UK startup need a 409A valuation?+
409A is a US concept. A UK company granting EMI options should consider the UK valuation process, including HMRC Shares and Assets Valuation.
What are AMV and UMV?+
Actual Market Value reflects applicable share restrictions; Unrestricted Market Value considers value without those restrictions. The distinction can matter for employee equity and EMI.
Do employee options need to be reported to HMRC?+
Employment-related securities can create annual ERS reporting obligations, normally due by 6 July after the tax year. Separate EMI notification rules may also apply.
Do options create an accounting expense?+
Potentially. FRS 102 can require a share-based payment expense even when no cash is paid for the award.
Is equity always better than a bonus?+
No. Equity supports long-term alignment, while commission or performance bonuses can work better for roles with measurable short-term results.
Final Takeaway
Startup equity should not begin with “Let's give this employee 1%.” Decide whether shares, options or cash fit; whether company and employee qualify for EMI; today's value and exercise price; vesting; section 431; HMRC reporting; dilution; exercise mechanics; and accounting.
Equity works best when legal documents, tax treatment, cap table, statutory records and accounting agree.
Sources
- HMRC — Enterprise Management Incentives (EMI)
- HMRC — Finance Act 2026 EMI Limits and Exercise Period Changes
- HMRC — EMI Valuation for Individual Limit
- HMRC Shares and Assets Valuation Manual — EMI
- HMRC — Get a Share Scheme Valuation
- HMRC — Restricted Securities: Section 431 Elections
- HMRC — Employment Related Securities: Submit Returns
- HMRC — Register Your Employment Related Securities Scheme
- HMRC — Employment Related Securities Bulletin 65 (April 2026)
- HMRC — Company Share Option Plans (CSOP)
- Companies House — Return of Allotment of Shares (SH01)
- Companies Act 2006 — Register of Members
- Financial Reporting Council — FRS 102
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Disclaimer: This article is for information only and is not legal, tax or accounting advice. Equity arrangements depend on individual circumstances. Consult qualified UK legal, tax and accounting advisers.