Exercising an Enterprise Management Incentive option often costs you nothing in tax at the moment of exercise. That is the whole design of the scheme. The tax on EMI options at exercise is normally zero if your exercise price was set at or above the Actual Market Value agreed with HMRC on the grant date. Income tax, and sometimes National Insurance, only enter the picture in three situations: the option was granted at a discount, a disqualifying event has taken you outside the 90-day window, or the shares you receive count as readily convertible assets. The larger tax question, and usually the more expensive one, arrives later when you sell.
When You Owe Nothing at Exercise
If your exercise price equals or exceeds the Actual Market Value of the shares on the date the option was granted, no income tax and no National Insurance are due when you exercise. This holds as long as the option met the statutory conditions under the Income Tax (Earnings and Pensions) Act 2003 from the outset.1GOV.UK. Employee Tax Advantaged Share Scheme User Manual – ETASSUM54320
In practice, the company will have agreed a market value with HMRC’s Shares and Assets Valuation office before granting, set the strike price at or above that figure, and documented when the option could be exercised. For most employees at private companies, this is exactly what happens. You pay the strike price, receive shares, and owe HMRC nothing on that day. Any growth in value between grant and exercise is not treated as income; it is held in the capital gains regime for when you sell.
When Income Tax Applies
Tax bites at exercise when the option was granted at a discount. If the strike price sits below the Actual Market Value recorded at grant, the gap between what you pay and that original market value is treated as employment income. You pay income tax on that spread at your marginal rate: 20% for basic-rate taxpayers, 40% for higher-rate, and 45% for additional-rate, for the 2025/26 tax year.2GOV.UK. Income Tax Rates and Personal Allowances The charge arises on the exercise date whether or not you sell the shares.
The income tax is calculated on the spread at grant, not on any growth since then. Growth from grant to exercise stays in the capital gains regime, which is why the original valuation matters so much.
When National Insurance Also Applies
National Insurance is due only when the shares you receive are “readily convertible assets.” That means they can be sold on a recognised stock exchange, or the company has arrangements in place under which they can be turned into cash. When that test is met, your employer must run the income tax and employee NIC through PAYE, so the deductions come off your pay or exercise proceeds directly.3GOV.UK. Employee Tax Advantaged Share Scheme User Manual – ETASSUM57020
Most private company shares are not readily convertible assets, so many EMI exercises escape NIC even when income tax is due. Where the shares do qualify as readily convertible, the employer also owes secondary NIC on the taxable spread. From April 2025 that rate is 15%.4GOV.UK. Changes to the Class 1 National Insurance Contributions Secondary Threshold and Rate
Some employers pass that secondary NIC cost to employees through a joint NIC election, signed by both parties and cleared with HMRC in advance. If you have signed one, the employer NIC you absorb reduces the amount subject to income tax, so the same money is not taxed twice.5GOV.UK. Employee Tax Advantaged Share Scheme User Manual – ETASSUM57180 Check your option paperwork; a joint election is worth knowing about before you exercise, not after.
Disqualifying Events and the 90-Day Window
The favourable exercise treatment can be lost if a disqualifying event happens before you exercise. These events are defined in sections 533 to 536 of ITEPA 2003 and include leaving the company, a takeover, or a fundamental change to the company’s trade.6legislation.gov.uk. Income Tax (Earnings and Pensions) Act 2003 – Section 533 Receiving further options that push you over the £250,000 individual limit is another trigger.
After a disqualifying event, you have 90 days to exercise on the original terms. Exercise within that window and the tax position is unchanged: no income tax on the spread if the strike price matched or exceeded market value at grant, and future growth taxed as capital gains. Miss the deadline, and any rise in share value between the disqualifying event and the exercise date is charged to income tax as employment income rather than capital gains. In a company that is growing quickly, or one being acquired, the difference between exercising on day 89 and day 91 can be very large.
Pin down the date of the event carefully. In an acquisition, the trigger is usually completion of the deal, not the announcement or the signing of heads of terms. The 90-day clock runs whether or not you are aware it has started.
What You Pay When You Sell the Shares
For most EMI holders the bigger tax event is the sale, not the exercise. Capital Gains Tax then applies to the difference between your sale proceeds and your base cost. Your base cost is what you paid to exercise, plus any amount already charged to income tax at exercise.
From 6 April 2025, standard CGT rates on share disposals are 18% for basic-rate taxpayers and 24% for higher-rate and additional-rate taxpayers.7GOV.UK. Capital Gains Tax – Rates and Allowances EMI shares can qualify for Business Asset Disposal Relief, which reduces the rate to 14% on qualifying gains for disposals from 6 April 2025.8GOV.UK. Business Asset Disposal Relief – Eligibility
Two conditions unlock this relief on EMI shares: the shares must have been acquired after 5 April 2013, and the option must have been granted at least two years before sale.8GOV.UK. Business Asset Disposal Relief – Eligibility The EMI version of the relief is more generous than the ordinary rules: you do not need to hold 5% of the company, and you do not need to be an officer or employee at the point of sale. The lifetime cap on qualifying gains is £1 million per person.9GOV.UK. HS275 Business Asset Disposal Relief (2026)
This is where the EMI structure earns its keep. A non-EMI private company option could produce an income tax bill at up to 45% on exercise. An EMI option on the same shares, granted at market value and sold after two years, faces CGT at 14% instead. On a £200,000 gain the gap is more than £60,000.
Limits That Can Change the Outcome
EMI options carry statutory caps that also affect what you pay. An individual can hold qualifying EMI options over shares worth up to £250,000, measured by the Unrestricted Market Value at each grant date.10GOV.UK. Employee Tax Advantaged Share Scheme User Manual – ETASSUM51020 Options granted beyond that ceiling are not qualifying options, and the excess loses EMI tax treatment.
The option must also be capable of exercise within 10 years of grant, or 15 years for a Specified Company.11GOV.UK. Employee Tax Advantaged Share Scheme User Manual – ETASSUM54020 Exercise outside that window is still possible, but the income tax protection on the spread falls away. The relief that applied at grant is not disturbed, so this is not a complete loss, but the shelter on exercise is gone.
If your grant sits below the £250,000 ceiling, the option is being exercised within the ten-year window, no disqualifying event has run its 90 days, the strike price matched market value at grant, and the shares are not readily convertible, exercise costs you no tax at all. The tax bill, if any, waits for the sale.