Unapproved share options — the tax term is "non-tax-advantaged" — are the plain vanilla of equity incentives: a right to buy shares at a fixed price, granted to anyone, in any company, in any amount, with no HMRC scheme rules attached. The freedom is total and so is the tax: where EMI delivers growth at capital gains rates, an unapproved option delivers it as employment income at exercise — income tax and, usually, National Insurance on the whole gain to that point. Knowing exactly how that charge works, and when unapproved is still the right tool, separates deliberate scheme design from expensive default.
The tax lifecycle
Grant: nothing. Granting an option to an employee triggers no tax — the charge waits for a chargeable event. Exercise: the main event. Income tax falls on the market value of the shares at exercise minus what the employee pays (exercise price, plus anything paid for the option itself). Whether NIC and payroll withholding apply turns on whether the shares are readily convertible assets — broadly, shares that can be sold (listed, or with arrangements to sell, as in an exit): RCA shares mean PAYE and Class 1 NIC through payroll; genuinely illiquid private-company shares mean the employee settles income tax through self assessment with no NIC. Since most unapproved options are exercised at exit — when a buyer is standing there — the RCA answer is usually "yes", and the option gain lands on the payroll in completion week. Afterwards: CGT. Growth above exercise-date value is capital gain on eventual sale; where the shares acquired are restricted, a joint s431 election within 14 days of exercise takes the restricted-securities charges off the table — taxing the acquisition on the unrestricted value up front in exchange — without, note, guaranteeing that every later receipt is capital: other employment-related securities rules can still bite.
Two structural softeners matter to the economics. The employer can receive a corporation tax deduction broadly equal to the employee's gain, in the period the shares are acquired — worth 25p per £1 at the main rate where the statutory conditions are met, and routinely forgotten in exit models (cash-settlement rights and group structures are the usual complications). And employer NIC (15%) on RCA gains can be transferred to the employee by joint election or agreement — HMRC's template versions need no pre-approval — with the transferred NIC deductible from the employee's taxable amount. Common in investor-driven companies; it needs signing before exercise, not after, and explaining to the employee whose net proceeds it reduces.
When unapproved is the right answer
Nobody chooses income tax treatment for fun; unapproved options earn their place where the statutory schemes cannot go:
- People the statutory schemes cannot reach — consultants, advisers and non-executive directors: EMI and CSOP have their own employment and working-time conditions, so awards to this wider cast are unapproved by default. Note that "not an ordinary employee" does not mean "outside the rules": NEDs are officeholders, and any award made by reason of an office or employment sits in the employment-related securities regime regardless of job title;
- Over the limits — the hire whose package exceeds EMI's £250,000, or a top-up where the CSOP interaction would disqualify existing EMI options;
- Excluded trades and overseas groups — trades outside EMI, and non-UK parents granting into the UK, where a foreign plan rarely meets the UK schemes' conditions (though a UK subsidiary can sometimes run its own qualifying scheme — worth testing rather than assuming);
- Speed and simplicity — no valuations agreed with HMRC, no working-time tests, no scheme registration conditions: an unapproved option can be granted this afternoon, which sometimes genuinely matters.
The discipline is to make unapproved a conclusion: check EMI (recently expanded), then CSOP (£60,000, tax-free exercise), then growth shares (capital treatment without scheme limits, at valuation risk) — and use unapproved for what remains. The pattern we unwind most often is the reverse: a whole management team on unapproved options from a template, paying 45%-plus-NIC on an exit that EMI would have taxed at 18%.
The compliance that still applies
"Unapproved" does not mean unreported. The arrangement is registered with HMRC as an "Other" scheme and every grant, exercise and chargeable event goes on the annual ERS return by 6 July — nil returns included once registered, with the automatic penalty ladder our ERS guide sets out. Exercises at exit need the payroll operated correctly in the completion mechanics (the buyer's diligence will check), the s431 elections signed inside their 14 days, and the corporation tax deduction actually claimed. The recurring failures are administrative, and they surface at the worst moment — in a data room.
Acumon designs and administers option arrangements across the whole family — the EMI/CSOP/growth-share/unapproved decision, grant documents, exit payroll mechanics and ERS compliance — through our tax planning and employment tax teams. If your cap table already carries unapproved options, the two cheap wins are checking whether future grants could ride a better regime, and making sure the exit-day payroll and elections are choreographed before a buyer forces the rehearsal.