EMI vs unapproved options — what's the difference?
By SuLe · Updated 7 July 2026
EMI options are HMRC's tax-advantaged share options for qualifying employees — no income tax at grant or exercise if priced at market value — while unapproved options have no eligibility conditions but tax the gain as employment income at exercise. EMI is almost always better where you can use it; unapproved options are the fallback where you cannot.
Key facts
- EMI, priced at market value at grant, carries no income tax or NIC at grant or exercise; the gain is a capital gain on sale.
- Unapproved options are taxed as employment income on the gain at exercise, with NIC too if the shares are readily convertible assets.
- EMI has strict conditions; unapproved options have none — they are the only route for contractors, advisors and companies that outgrow EMI.
- EMI shares can qualify for Business Asset Disposal Relief without the 5% shareholding test; unapproved shares generally cannot.
- Both must be reported on HMRC's annual ERS return by 6 July each year.
What is the core difference between EMI and unapproved options?
Both are options — a right to buy shares later at a fixed price — so mechanically they look identical. The difference is entirely tax and eligibility.
EMI is a statutory scheme with conditions: the company must qualify, and the holder must be an employee meeting the working-time and material-interest tests. Meet them all, and HMRC rewards you with a light tax treatment.
An unapproved option is simply an option that is not part of a tax-advantaged scheme. It has no conditions at all, which is its strength and, tax-wise, its weakness.
How are the two taxed?
This is where they part ways. An EMI option priced at the market value agreed with HMRC at grant attracts no income tax or National Insurance on grant or exercise — the whole gain rolls into a capital gain, taxed only when the shares are sold.
An unapproved option taxes the gain at exercise as employment income. The difference between the market value at exercise and the price paid is taxed like salary, at rates up to 45%, plus National Insurance if the shares are readily convertible assets.
That single distinction — capital gain versus employment income — is what makes EMI worth its conditions.
When would I use unapproved options instead of EMI?
When EMI is off the table. The most common reason is that the recipient is not an employee: contractors, advisors and non-executive directors cannot hold EMI options, so unapproved options or growth shares are the only routes. [More: Can contractors or advisors receive share options?]
The second reason is size. Once a company has gross assets over £30m or 250 or more full-time-equivalent employees, EMI closes to new grants and you look to unapproved options or a CSOP instead.
The third is trade: a company whose activities fall outside the qualifying-trade rules never had EMI available in the first place.
What are the practical trade-offs?
EMI costs a little more to run — an HMRC valuation, scheme rules, a notification deadline — in exchange for a much better outcome for the employee. For an eligible startup that is almost always the right trade.
Unapproved options are quicker and more flexible: no valuation to agree, no notification, no eligibility gate. But the employee bears income tax on exercise, and if the shares are readily convertible, employer NIC can arise too, sometimes passed to the employee by agreement.
Many startups run both — EMI for the team that qualifies, unapproved options or growth shares for everyone else.
| EMI options | Unapproved options | |
|---|---|---|
| Who can receive | Qualifying employees only | Anyone — employees, contractors, advisors, NEDs |
| Company conditions | Gross assets ≤£30m, <250 FTE, qualifying trade, independent | None |
| Tax at grant | None | None |
| Tax at exercise | None if priced at market value at grant | Income tax on the gain; NIC if readily convertible |
| Tax on sale | Capital gain; BADR possible without 5% test | Capital gain on any further growth |
| HMRC valuation | Advance agreement usual | Advisable but not protected |
| HMRC notification | By 6 July after tax year of grant | ERS annual return only |
Worked example
Dev runs Kestrel Health, a femtech startup, and grants his lead clinician Hana an option over 10,000 shares at £0.50 — the market value HMRC has agreed — under EMI. Two and a half years later Kestrel is acquired at £5.00 a share.
Hana exercises, paying 10,000 × £0.50 = £5,000, and sells shares worth £50,000. Her £45,000 gain is a capital gain; more than two years have passed since grant, so Business Asset Disposal Relief can apply — at the 2025/26 rate of 14% (check the current figure) that is about £6,300 of tax.
Had the same option been unapproved, the £45,000 would have been employment income at exercise: income tax of roughly £18,000 at 40%, plus National Insurance on top. Same shares, same gain — very different tax.
Where founders go wrong
Defaulting to unapproved options out of habit.
If the company and the hire qualify, EMI is almost always the better answer — use unapproved only where EMI genuinely cannot reach.Assuming unapproved options are tax-free at exercise.
The gain is taxed as income the moment the option is exercised, whether or not the shares are sold.Forgetting employer NIC on readily convertible shares.
An exit can turn shares into readily convertible assets and trigger NIC — sometimes passed to the employee.Not documenting a valuation for unapproved grants.
HMRC can still challenge the value the employee is taxed on, so a defensible figure matters even without EMI.
Related questions
Are unapproved options bad?
No — they are just untaxed-advantaged. Unapproved options are flexible and have no eligibility conditions, so they work where EMI cannot: for contractors, advisors, non-executive directors, or once a company outgrows the EMI size limits. The trade-off is income tax, and possibly NIC, on the gain at exercise. [More: What is an EMI share option scheme?]
Can I have both EMI and unapproved options in the same company?
Yes. Many startups run EMI for qualifying employees and use unapproved options or growth shares for everyone else. The schemes sit side by side, and both must be reported on HMRC's annual ERS return. [More: What are growth shares?]
Why would I ever choose unapproved over EMI?
Usually because EMI is not available — the recipient is not an employee, the company has grown past 250 employees or £30m of gross assets, or the trade does not qualify. Occasionally the flexibility of unapproved terms is worth the tax cost for a specific hire. [More: Who is eligible for EMI options?]
Do unapproved options need an HMRC valuation?
There is no EMI-style advance valuation to protect, but you still need a defensible market value to work out the tax at exercise. A valuation is good practice even for unapproved options, because HMRC can challenge the figure the employee is taxed on. [More: What is an EMI valuation and how do I get one?]
Is National Insurance always due on unapproved options?
Only if the shares are "readily convertible assets" — broadly, where there is a way to turn them into cash, such as an imminent sale. Then both employee and employer NIC can arise at exercise, and the employer NIC is sometimes passed to the employee by agreement. [More: What is a CSOP and when does it beat EMI?]
Choosing between EMI and unapproved options is really a question of who the recipient is and whether the company qualifies — and getting it wrong can leave a valued hire with an income-tax bill you could have avoided. A SuLe solicitor can map the right instrument to each person on your team. Book a free call about your option scheme and put everyone on the most efficient footing.
Keep reading: What is an EMI share option scheme? · Who is eligible for EMI options? · Can contractors or advisors receive share options? · What are growth shares? · What is a CSOP and when does it beat EMI? · What exercise price should EMI options have?
Primary sources: GOV.UK — Enterprise Management Incentives (EMIs)
