Vesting Schedules for Employee Share Options: Tax and Timing in the UK 2026

What Is a Vesting Schedule?

A vesting schedule is a timetable that sets out when an employee becomes entitled to exercise their share options or receive their shares. Before options vest, they exist only as a conditional entitlement. Once they vest, the employee can choose when (and whether) to exercise -- within the expiry window of the option.

The purpose of vesting is alignment: it incentivises employees to stay with the company and contribute to its growth, because leaving early means forfeiting unvested options.

The standard UK startup vesting schedule is:

• A 1-year "cliff": no vesting in the first 12 months. If the employee leaves before 12 months, they forfeit all options.
• After 12 months: 25% of options vest at the cliff
• Remaining 75%: vest monthly (or quarterly, or annually) over the following 3 years

So a 4-year schedule with a 1-year cliff means 25% vests at month 12, then 1/48 of the total grant vests each month, with 100% vested by month 48.

Some companies use performance vesting (options only vest if revenue or other targets are hit) or double-trigger acceleration (all options vest if both the company is acquired AND the employee is made redundant within 12 months).

Understanding your vesting schedule is the essential first step before thinking about tax. The tax treatment depends heavily on which type of share scheme the options fall under.

EMI Options: The Tax-Efficient Gold Standard

The Enterprise Management Incentive (EMI) is the most tax-advantaged employee share option scheme in the UK, designed specifically for growth companies. HMRC's approval is not required but companies must notify HMRC of EMI grants within 92 days.

Eligibility for EMI:

• Company must have gross assets of no more than £30 million and fewer than 250 full-time equivalent employees
• Company must be an independent trading company (not a subsidiary, no controlling company)
• Employee must work at least 25 hours per week or 75% of their working time for the company
• Maximum individual EMI grant: £250,000 in any 3-year period
• Company-wide EMI limit: £3 million of outstanding unexercised options

How EMI options are taxed:

If granted at or above the market value agreed with HMRC's Share Valuation team (at the date of grant):

• Grant: No tax
• Vesting: No tax (vesting is an administrative event for EMI purposes)
• Exercise: No income tax, no NI -- provided the exercise price equals or exceeds the market value at grant
• Sale of shares: CGT applies on the gain (proceeds minus exercise price). If 24 months have elapsed since grant date, Business Asset Disposal Relief (BADR) may apply, reducing CGT to 10%.

If EMI options are granted below market value (a "discount" EMI), income tax and NI arise on the discount amount at exercise. This is uncommon in practice.

Business Asset Disposal Relief on EMI: From April 2025, BADR reduced from 10% to 14% for the 2025/26 tax year, rising to 18% from April 2026. Check the current BADR rate when planning disposals -- the 10% "headline" rate no longer applies from 2026 onward. The lifetime limit remains £1 million of qualifying gains.

CSOP Options: The Mid-Market Alternative

Company Share Option Plans (CSOPs) are approved by HMRC and offer income tax and NI relief on exercise -- but are available to companies of any size, unlike EMI which is restricted to smaller businesses.

CSOP key rules:

• Individual limit: £60,000 of options (raised from £30,000 in April 2023)
• Must be exercised between 3 and 10 years after grant
• Exercise price must not be less than market value at grant
• No income tax or NI on exercise if the 3-year minimum period and other conditions are met
• CGT applies on subsequent sale

CSOPs are less flexible than EMI (they have minimum exercise periods and set rules on who can participate) but are the primary alternative for larger companies where EMI is not available.

Unapproved Options: The Tax-Heavy Route

Unapproved options (also called non-tax-advantaged options or NSOs) are any share options that do not fall under EMI, CSOP, SAYE or CSOP. They are often used for senior executives who have exceeded the EMI individual limit or for companies that are too large for EMI.

Tax treatment at exercise:

When an employee exercises an unapproved option, the "spread" -- the difference between the market value of the shares at the date of exercise and the exercise price paid -- is treated as employment income. It is subject to:

• Income tax at the marginal rate (20%, 40% or 45%)
• Employee National Insurance at 8% (on earnings within the primary threshold to UEL) or 2% (above UEL)
• Employer National Insurance at 15% (on the spread value)

The employer NI transfer: Employer NI on share option gains can legally be transferred to the employee under a "joint election" agreement. This is common for senior executive option schemes. The employee then has to pay both employee AND employer NI, increasing their NI liability -- but the company saves the employer NI cost, which may be reflected in the option terms.

Exercise timing matters significantly for unapproved options:

• Exercising just before the end of the tax year, when you have already used most of the basic rate band, means the entire spread is taxed at 40%+
• Exercising early in a tax year when other income is lower (e.g. a sabbatical year, or a year of reduced hours) can keep the spread within the basic rate band
• Spreading exercises across multiple tax years is a common planning technique

RSUs: Income Tax at Vesting

Restricted Stock Units (RSUs) work differently from options. There is no exercise -- instead, shares are simply awarded to the employee when they vest. HMRC treats the vesting event as receipt of employment income.

Tax treatment of RSUs:

• At vesting: income tax and NI (via PAYE) on the full market value of the shares at the vesting date
• After vesting: any subsequent increase in value is a CGT gain (taxable on disposal)
• The employer will typically sell some of the vesting shares to cover the PAYE tax liability ("sell to cover")

RSUs are common among US-listed companies (where the structure aligns with Section 83 of the US Internal Revenue Code) and are increasingly used by large UK tech companies. The tax treatment is straightforward but can be very expensive in high-growth companies where share prices have risen significantly since the grant date.

RSU planning considerations:

• If you have a choice, it may be worth deferring RSU vesting to a year with lower other income
• After vesting, hold shares for future CGT planning rather than immediately selling if you believe the share price will continue to rise (balanced against concentration risk)
• Use the £3,000 CGT AEA each year to realise gains on vested shares tax-efficiently

SAYE: The Employee Favourite

Save As You Earn (SAYE, also called Sharesave) is one of the most underused tax benefits in the UK. Under SAYE:

1. The company sets a 3- or 5-year savings period
2. The employee saves between £10 and £500 per month (from salary)
3. At the end of the savings period, the employee uses their savings to buy shares at the option price -- which can be set at up to 20% below the market value at the start of the scheme
4. If the share price at maturity is higher than the option price, the employee buys shares at the discounted option price and can immediately sell for a profit -- this gain is completely free of income tax and NI
5. If the share price has fallen below the option price, the employee can simply withdraw their savings (including a small tax-free bonus on 5-year schemes)

SAYE is described as "heads you win, tails you get your money back." The downside is the lack of flexibility -- you must save the same amount every month and cannot access the money early without losing the option.

SAYE and CGT: If you hold SAYE shares after purchase (rather than immediately selling), any further gain is subject to CGT in the normal way.

Growth Shares: CGT From Day One

Growth shares are a type of ordinary share issued at market value but with a high "hurdle" -- they only participate in company value above a set threshold. They are typically used for management teams in PE-backed businesses.

Because growth shares are purchased at (or near) true market value (albeit with the hurdle reducing that value), there is generally no income tax at grant. All returns come as CGT on sale, potentially qualifying for BADR.

The valuation of growth shares is complex and requires a formal HMRC-agreed valuation to ensure the strike price is correctly set. HMRC scrutinises growth share arrangements carefully.

Practical Planning: Timing Your Exercises

Across all option types, timing is one of the most powerful tools available. Key considerations:

1. Use each year's CGT AEA: With the AEA at £3,000, spreading disposals over multiple years means more tax-free gain. A large single disposal forfeits the annual exemption for future years.

2. Stay within the basic rate band: For unapproved options and RSU vesting, the marginal rate matters. Exercises that push you into the 40% band incur nearly double the tax. Model your total income for the year before exercising.

3. BADR: check the clock: For EMI, the 24-month period runs from grant, not exercise. If you are approaching the 24-month anniversary, check whether it is worth waiting to secure BADR eligibility.

4. Consider ISA shelter: Shares acquired through SAYE or CSOP can be transferred into a Stocks and Shares ISA within 90 days of exercise, sheltering future gains from CGT entirely. The amount transferred counts against the £20,000 ISA allowance for the year.

5. Married couples and civil partners: Transfers of shares between spouses are no-gain/no-loss for CGT. Transferring shares to a spouse in a lower CGT rate band (18% vs 24%) before sale can reduce the CGT bill, subject to the shares genuinely being transferred.

Employee share schemes are one of the more complex areas of personal taxation, and the interaction between vesting schedules, option types and annual income levels can produce very different outcomes. A one-hour session with a qualified tax adviser at exercise time is often cost-effective when significant sums are involved.