Shares from your employer: reward or tax trap?
Being offered shares in the company you work for can feel like a pat on the back. It can also be one of the most tax-efficient ways to build wealth. But get the rules wrong, and a share award can land you with an income tax bill on shares you can't even sell yet.
In this blog, we're looking at employee share schemes: what they are, how they're taxed, and what you need to tell HMRC.
Why do employers offer shares?
Share schemes are used to:
reward employees for the work they've done
incentivise them to help grow the value of the company
retain good people, as the best rewards usually come to those who stay.
Share or option: what's the difference?
With a share award, you're given (or buy) shares straight away.
With a share option, you're given the right to buy shares at a set price within a set time window. If the company grows, you can buy at the old, lower price. If it doesn't, you can simply walk away.
The default rule: shares are pay
If your employer gives you shares, or lets you buy them cheaply, HMRC normally treats the value you receive as employment income, just like a bonus.
How the tax is collected depends on whether the shares are "readily convertible assets", which broadly means they can easily be sold for cash (for example, shares listed on a stock exchange):
Readily convertible: tax and National Insurance come off through PAYE. The usual rule that PAYE can't take more than 50% of your cash pay doesn't apply, so a big award can wipe out most of a payslip.
Not readily convertible (common in private companies): no PAYE or National Insurance, but you must pay the income tax yourself through Self Assessment.
Example: Priya has "unapproved" options over 2,000 shares at £1 each. She exercises when the shares are worth £5, paying £2,000 for shares worth £10,000. The £8,000 difference is taxed as income: £3,200 for a higher-rate taxpayer, before any National Insurance. If the shares can't be sold straight away, she has to find that tax from her own pocket.
Some employers also ask employees to pay the employer's National Insurance on an exercise. If you agree, what you pay reduces the amount taxed as your income.
The four tax-advantaged schemes
The government has created four schemes that can take most or all of the income tax and National Insurance out of the picture, leaving only capital gains tax when you sell.
Share Incentive Plans (SIPs)
A SIP is open to all employees, full and part-time, although employers can exclude those with less than 18 months' service. Shares are bought by a trust and held there for you. There are four types:
Free shares: given by your employer, up to £3,600 a year.
Partnership shares: bought by you out of gross salary, before tax and National Insurance, up to the lower of £1,800 or 10% of salary a year. For a higher-rate taxpayer, £1,800 of shares costs around £1,044.
Matching shares: up to two extra free shares for every partnership share you buy.
Dividend shares: dividends on your plan shares, reinvested in more shares.
The key is patience. Take shares out within three years and they're taxed as income on their value at that point. Between three and five years, you're taxed on the lower of their original value and their value when taken out. After five years, there's no income tax at all.
There's a bonus too: your capital gains tax starting point is the value when shares leave the plan. Keep them in for five years and sell straight from the plan, and there's usually no capital gains tax either.
Save As You Earn (SAYE or "Sharesave")
SAYE is one of the few ways to invest in shares where you can't lose your savings. You save a fixed £5 to £500 a month from your pay for three or five years. At the start, you're given an option to buy shares at a price up to 20% below their market value. At the end, you either buy the shares or take your cash back, plus any tax-free bonus.
It's open to all employees, although employers can exclude those with less than five years' service. There's no income tax or National Insurance when the option is granted or when you buy. You only pay capital gains tax on any profit when you sell.
Example: Ben saves £250 a month for three years, building up £9,000. His option price is £4 a share (20% off £5), so he can buy 2,250 shares. Three years later they're worth £8. He buys £18,000 of shares for £9,000, with no income tax. If the price had fallen, he'd just have taken his £9,000 back.
Tip: you can move SAYE shares into a stocks and shares ISA within 90 days of buying them, so future growth and dividends are tax-free. If you leave your job voluntarily, your options usually lapse, but your savings are still yours.
Company Share Option Plans (CSOPs)
A CSOP lets employers give options to chosen employees, so it's popular for key staff. The option price must be at least market value on the day of grant (no discount), and you can hold CSOP options over shares worth up to £60,000. Anyone owning more than 30% of a close company can't take part.
Here, timing is everything. Exercise between three and ten years after the grant and there's no income tax or National Insurance, just capital gains tax when you sell. Exercise earlier or later, and the growth is taxed as income (with some exceptions for good leavers).
Example: Aisha has options over 10,000 shares at £3. After four years she exercises at £9: no income tax. Had she exercised after two years at the same price, £60,000 would have been taxed as income, costing £24,000 at 40%.
Enterprise Management Incentives (EMI)
EMI is designed for smaller, growing companies, and can be the most valuable scheme of all. Employers can choose who takes part, and each employee can hold options over shares worth up to £250,000. The company must carry on a qualifying trade (financial activities, legal services, farming and property development are excluded).
From 6 April 2026, many more companies qualify:
total options per company: up from £3 million to £6 million
company gross assets: up from £30 million to £120 million
company size: up from fewer than 250 to fewer than 500 full-time equivalent employees
exercise window: up from 10 to 15 years from grant.
There's never tax when the option is granted. If it was granted at market value, there's no income tax or National Insurance when you exercise either. When you sell, Business Asset Disposal Relief can cut the capital gains tax rate to 18% (instead of 24%) if the option was granted at least two years earlier.
Example: Tom has EMI options over 20,000 shares at £2. Five years later he exercises at £10 and sells. His £160,000 gain is taxed at 18%, saving over £9,000 compared with 24%. Through an unapproved scheme, it would have been taxed as income at up to 45%.
Watch out for disqualifying events, such as leaving the company, cutting your hours, or the company being taken over. You have 90 days to exercise and keep the full relief.
Anything outside these schemes is "non-tax-advantaged" (often called "unapproved"). Those always carry an income tax charge.
What's new
EMI has doubled in size from April 2026, as above.
EMI grant notifications to HMRC are due to be scrapped from April 2027. Until then, companies must still notify grants as usual.
SIP holding periods have been reviewed, with some calling for the five-year period to be cut to three or two years. No change has been made yet.
Dividend tax went up in April 2026, to 10.75% for basic-rate and 35.75% for higher-rate taxpayers, which affects dividends on employee shares.
When you sell
Once you own the shares, any growth in value is normally subject to capital gains tax when you sell. For 2026/27:
the first £3,000 of gains each year is tax-free
gains within your basic rate band are taxed at 18%
gains above it are taxed at 24%
qualifying EMI shares can get Business Asset Disposal Relief at 18%.
Don't pay tax twice. This is the most common mistake we see. If you were taxed on shares as income when you got them, that amount is added to your base cost. If you paid £2,000 for shares worth £10,000 and were taxed on £8,000, your base cost is £10,000, not £2,000.
Ways to cut the bill:
spread sales across tax years to use more than one £3,000 allowance
transfer shares to your spouse or civil partner first (tax-free between you) to use both allowances and any unused basic rate band
move SAYE and SIP shares into an ISA within the time limits
remember only the first £500 of dividends is tax-free.
Telling HMRC: you'll usually need a Self Assessment return if your gains are over £3,000, your total sale proceeds are over £50,000, or you've had share income that wasn't taxed through PAYE. The online deadline for 2025/26 is 31 January 2027. Your employer must also file an annual share scheme return by 6 July, so HMRC will know about your awards.
What you need to do
Check which scheme your shares or options are under. Your plan documents will say.
Diarise key dates: holding periods, exercise windows and leaving dates can all change the tax.
If your shares aren't taxed through PAYE, or you've sold shares at a gain, you'll probably need to file a Self Assessment tax return.
How Surrey Hills Tax can help
We help employees understand their share awards, work out the tax before they act, and report everything correctly to HMRC. If you've been offered shares or options, get in touch before you exercise or sell.
This blog is general information based on the rules for 2026/27 and isn't personal tax or investment advice. Your own position may differ, so please speak to us before acting.