Growth shares are a separate class of shares that participate only in value above a hurdle — set at or above what the company is worth today. Because the existing value is walled off, the new shares carry a low — though rarely nil — value at issue, so employees (or anyone else) can acquire them cheaply without an income tax charge, and growth from that point is taxed as capital gains at 18% or 24% rather than as employment income at up to 45% plus NIC. No statutory scheme, no HMRC approval, no company size limits, no employee-only restriction.
That freedom is exactly why growth shares are both the most flexible equity incentive in UK practice and the easiest to get wrong. Here is how they work and where the risk actually sits.
The mechanics: a hurdle does the work
The company creates a new share class through its articles. The class shares in proceeds and value only above a hurdle — a company worth £10 million might set it at £12 million, so growth shares see nothing until value clears £12 million and then share in the excess alongside (or by formula with) the ordinary shares. Setting the hurdle at a premium to today's value — market practice runs from around 10% to 40% above — is what keeps the shares cheap at issue. Cheap is not free: even out-of-the-money shares carry "hope value" for their chance of future growth, and the valuation must price it. The tax design is simply that acquiring an asset at its genuine (low) market value triggers no employment income.
From there the holder is simply a shareholder. On an exit at £20 million in the example above, the growth shares share in £8 million of value, taxed as capital gain over their small acquisition cost. The company has delivered a meaningful upside stake with no income tax, no NIC on either side, and no scheme rules constraining who got it — including consultants, non-executives and advisers who could never hold EMI options.
Where the tax risk lives: the valuation
Everything above depends on one number: the market value of the growth shares at acquisition. Pay that value (or be taxed on the shortfall) and the structure holds. But unlike EMI, HMRC will not agree a growth share valuation in advance — there is no clearance, no VAL231 equivalent. The company commissions an independent valuation, documents the hurdle logic, and lives with the position. If HMRC later argues the shares were worth more than was paid — hurdle too low, exit already in negotiation, valuation cursory — the difference is employment income, with PAYE and NIC, plus penalties for the company that operated none.
The discipline that protects the structure: a genuinely arm's-length valuation from someone who does these regularly, a hurdle with visible headroom over the last funding round or recent profits, issue before corporate events rather than during them, and — always — a joint section 431 election within 14 days of acquisition, which deals with the restricted-securities rules specifically (other employment-related securities provisions can still apply to engineered arrangements) so that ordinary future growth stays in the CGT world. Fourteen days, jointly signed, kept on file; it is the cheapest insurance in equity incentives and the most commonly missed.
Growth shares against the alternatives
The decision tree in practice: EMI first, always, where the company and employee qualify — options up to £250,000, HMRC-agreed valuations and the BADR fast-track beat growth shares on every tax axis (our EMI guide covers the newly expanded limits). CSOP second for companies outside EMI wanting a statutory scheme — see our CSOP guide. Growth shares come into their own where neither fits: companies over even the new EMI limits, excluded trades such as property development, rewards for non-employees, or stakes bigger than the statutory caps allow. They also stack: plenty of scale-ups run EMI for the wider team and growth shares for a founder-level hire arriving after the valuation got expensive.
Two structural side-effects to price in. Growth shares dilute the ordinary shareholders' future growth, and investors — especially institutional ones — will want the hurdle, the class rights and the leaver provisions negotiated properly. And holders are shareholders from day one: voting (or not), dividends (or not), information rights and drag-along all need writing into the class rights deliberately rather than inherited by accident.
Leavers, and the paperwork that keeps it clean
Growth share plans live or die on their leaver terms. Standard practice is good-leaver/bad-leaver provisions with buyback at the lower of cost and market value for bad leavers — drafted into the articles at issue, because renegotiating with a departed employee holding equity is nobody's favourite project. On compliance, growth shares acquired by reason of employment are employment-related securities: the acquisitions go on the annual ERS return by 6 July, nil returns included, with automatic penalties for silence.
Done well — real valuation, sensible hurdle, s431 elections, tight articles, ERS returns filed — growth shares are a two-week project that delivers capital treatment on unlimited upside for anyone the company wants to reward. Done from a template, they are an income tax reassessment waiting for the exit due diligence to find them.
Acumon designs growth share structures end to end — valuation, hurdle-setting, elections and the ongoing ERS compliance — through our tax planning and valuations teams. If you have been quoted an EMI refusal as the end of the equity conversation, it is actually the start of this one.