Growth Shares Explained: How UK Companies Reward Staff Without a Big Upfront Tax Bill

What Growth Shares Are

Growth shares are a separate class of ordinary shares, specifically structured so that they only carry an entitlement to a share of the company's value above a defined threshold — the "hurdle" — usually set at or close to the company's current market valuation when the growth shares are created.

The logic: existing shareholders have already built up value in the company reflected in its current valuation. Growth shares are designed to reward employees for future growth beyond that existing value, without giving them a share of value that's already been created — which is precisely why they can be issued at a low cost with minimal upfront tax exposure.

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How the Hurdle Mechanism Works

If the company's value never exceeds the hurdle, the growth shares remain worth little or nothing — reflecting genuine commercial risk for the employee, similar in spirit to how share options work, but structured as an actual share class rather than an option to acquire shares later.

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Tax Treatment on Acquisition

The key tax question at the point of issue is whether the employee paid full market value for the growth shares. Because a well-structured growth share (with a hurdle at or above current company value) genuinely has little or no market value at that moment, employees can typically acquire them for a low price without this being treated as an under-value acquisition that would trigger an income tax charge (under the employment-related securities rules).

This makes getting a robust, defensible valuation critical. If HMRC later considers the growth shares were actually worth more than the price paid at issue (for example, if the hurdle was set unrealistically low relative to genuine business prospects), it could assess an income tax charge on the difference — a significant risk companies need to manage carefully, typically by engaging an independent valuation specialist and, in appropriate cases, seeking HMRC agreement on valuation in advance.

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Tax Treatment on Eventual Sale

Provided the shares were genuinely acquired at market value (no income tax charge on acquisition) and are held as capital assets, the gain realised when the employee eventually sells the growth shares is generally taxed under capital gains tax rules:

This capital treatment — rather than income tax at up to 45% plus National Insurance — is the central attraction of growth shares as an employee incentive structure, particularly for founders wanting to reward key hires without diluting existing shareholders' value or creating a large PAYE liability.

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Growth Shares vs EMI Options

For companies that qualify for EMI, it's generally the preferred first option due to its more established tax certainty and lower valuation dispute risk. Growth shares are typically considered where EMI isn't available (for example, larger companies, non-trading companies, or companies with disqualifying share structures) or where founders specifically want employees to hold actual shares rather than options.

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Practical Steps for Companies Considering Growth Shares

1. Obtain an independent valuation of the whole company and, specifically, the growth share class being created, before issuing any shares.
2. Set the hurdle carefully — too low, and it risks an HMRC challenge that the shares were undervalued; too high, and it may fail to meaningfully motivate the employee if growth beyond the hurdle seems unrealistic.
3. Get specialist legal advice on drafting the articles of association and share rights correctly — the mechanics of how growth shares participate in value on exit (sale, IPO) need to be precisely defined.
4. Consider combining growth shares with a properly drafted shareholders' agreement addressing good/bad leaver provisions, drag-along/tag-along rights, and what happens to the shares if the employee leaves before an exit event.
5. Review whether EMI eligibility might be available instead, given its more established, lower-risk tax treatment where the company genuinely qualifies.