Non-tax-advantaged share schemes are UK equity arrangements that sit outside HMRC’s approved plans like EMI or SIP. A company can hand shares or options to any employee, consultant, non-executive director, or overseas worker it chooses, on any terms it wants. The trade-off is tax: income tax bites at acquisition rather than being deferred or reduced, and the employer picks up real compliance duties around valuation, PAYE, and an annual return due each 6 July.
Companies reach for this route when approved schemes are too rigid. Approved plans cap participation, limit share values, and impose qualifying conditions that don’t always suit commercial reality. A non-approved scheme carries none of those constraints, which is why it’s the default tool for bespoke management incentive plans, particularly in private companies preparing for a sale.
The Structures You’ll Usually See
Growth shares are the most common format. The company issues a new share class that only participates in value above a hurdle set at or near the current valuation. Because the shares have almost no value on day one, the taxable amount at acquisition is often negligible, and the employee only profits if the business grows beyond the baseline.
Nil-paid or partly-paid shares work differently. The employee acquires ordinary shares without paying the full price upfront and owes the balance to the company, usually settled on sale or through a future bonus. The outstanding amount can trigger a notional loan charge under ITEPA 2003 if treated as a beneficial loan, so the terms need careful drafting.
Joint Share Ownership Plans split the economic interest between the employee and an employee benefit trust. The trust holds the current value; the employee holds the rights to growth above a threshold. The upfront tax exposure is limited in a similar way to growth shares, though the legal mechanics are heavier. All three formats run on general tax and contract law rather than pre-approved rules, which is what makes them quick to implement and flexible to structure.
Income Tax When Shares Are Acquired
The main charge lands when the employee acquires shares or exercises an option. Under Part 7 of the Income Tax (Earnings and Pensions) Act 2003, the taxable amount is the difference between the shares’ market value and whatever the employee actually paid.1Legislation.gov.uk. Income Tax (Earnings and Pensions) Act 2003 – Part 7 Free shares worth £5,000 produce £5,000 of employment income, taxed at the employee’s marginal rate through PAYE.
Market value is the price the shares would fetch in an arm’s-length transaction. For listed companies that figure is obvious. For private companies it takes work, often an independent valuation, because HMRC can challenge any figure it considers artificially low. The valuation date is the date of acquisition or exercise, not the date the scheme was set up or the option was granted.
The employer runs this through payroll, deducting income tax (and NIC where it applies) before the employee gets the shares or cash equivalent. If the shares are not readily convertible assets, the employee may instead report the income through self-assessment. Getting the classification right matters, because the wrong route creates underpayment problems that surface later.
The 14-Day Section 431 Election
Where the shares carry restrictions that reduce their value — forfeiture clauses, transfer limits, compulsory sale on leaving — ITEPA 2003 treats them as “restricted securities.” Without an election, the employee pays income tax on the lower restricted value at acquisition, and then faces further income tax every time a restriction is lifted or varied, based on the value uplift at that point. For shares in a growing company, the total bill can dwarf what a full upfront charge would have cost.
A Section 431 election lets employee and employer jointly agree to ignore the restrictions for tax purposes. The employee pays income tax at acquisition on the full unrestricted market value, and all future growth then falls under capital gains tax when the shares are sold, rather than being taxed as employment income at up to 45%.
The deadline is tight. Both parties must sign the election within 14 days of acquisition. Miss it and the election is invalid, with no simple workaround. For growth shares issued at minimal value, filing on day one is almost always the right move: the income tax charge is tiny, and every pound of future appreciation shifts into the capital gains regime. Employers should build the election into their standard onboarding step for new participants.
When National Insurance Applies
NIC only applies where the shares qualify as readily convertible assets. An asset is readily convertible if it can be sold on a recognised investment exchange, if trading arrangements exist for it, or if such arrangements are likely to come into existence.2GOV.UK. NIM06835 – Class 1 NICs: Securities: Readily Convertible Assets Listed shares almost always qualify. Private company shares usually don’t, unless a sale or listing is imminent or the company has arranged a buyback facility.
Where shares are readily convertible, the employer accounts for both employee and employer Class 1 NIC through payroll. Employer NIC runs at 13.8% of the taxable value, and the employee’s share is deducted alongside income tax.3GOV.UK. EIM11901 – PAYE: Meaning of Readily Convertible Assets Where shares are not readily convertible, no Class 1 NIC applies, which is one reason private company schemes tend to carry a lower overall tax cost.
Employer and employee can enter into a joint election transferring the employer’s NIC liability to the employee. This reduces the cost to the company and, because the transferred NIC becomes a deductible expense for the employee, can produce a better net position overall. The election must be in HMRC’s approved form and signed before the taxable event.
Capital Gains Tax on Sale
When the employee sells the shares, capital gains tax applies to any profit above base cost. Base cost is the market value already taxed at acquisition, plus anything the employee actually paid. Tax at acquisition on £10,000 followed by a sale at £15,000 produces a £5,000 taxable gain, so the same value isn’t taxed twice.
For 2025/26 the annual exempt amount is £3,000, and only gains above that are taxed.4GOV.UK. Capital Gains Tax: What You Pay It On, Rates and Allowances From 6 April 2025 the rates are 18% for basic-rate taxpayers and 24% for higher and additional-rate taxpayers.5GOV.UK. Capital Gains Tax Rates and Allowances The rate applies once the gain is added to the individual’s taxable income for the year, so someone near the basic-rate threshold may pay a blended rate.
Business Asset Disposal Relief can cut the rate to 14% on the first £1 million of qualifying lifetime gains, where the employee holds at least 5% of the company’s shares and has been an officer or employee for at least two years. Qualifying conditions must be met at the time of sale, so eligibility is worth checking well before a disposal.
Keep the paperwork. Original acquisition documents, the valuation used for income tax, and any Section 431 election need to be retained; without them, establishing base cost years later is genuinely difficult, and HMRC can default to a lower figure that inflates the gain.
Annual Reporting to HMRC
Every non-tax-advantaged scheme has to be reported to HMRC through an Employment Related Securities return each tax year. The return captures every taxable event during the year — grants, option exercises, disposals, variations — with dates, share numbers, and the National Insurance number of each participating employee.
Two valuation figures sit at the heart of the return: the Actual Market Value (reflecting restrictions) and the Unrestricted Market Value (ignoring them). The gap between the two determines how income tax charges are calculated on restricted securities.6GOV.UK. ERSM30400 – Restricted Securities: Calculation of Charge Data has to be entered on HMRC’s official technical spreadsheets; formatting errors or missing fields cause the whole return to be rejected. Retain the supporting valuation evidence for at least six years, because HMRC enquiries into share scheme valuations are common and can open long after filing.
Before filing, the employer must register the scheme through HMRC’s online Employment Related Securities service via the Government Gateway.7HM Revenue & Customs. Register Your Employment Related Securities Scheme Registration should be completed by 6 July following the tax year of the first reportable event. Agents can view and file returns for registered schemes but cannot register or close a scheme themselves.
Once registered, the employer uploads the completed spreadsheets through the portal, which runs validation checks and flags errors before submission. Even in a year with no reportable events, a nil return is still required to confirm that nothing happened.8GOV.UK. Employment Related Securities: Submit Returns The hard deadline for every ERS return is 6 July after the end of the tax year, so 2025/26 returns are due by 6 July 2026.
What Late Filing Costs
HMRC issues penalties automatically the moment the 6 July deadline passes, and there is no grace period:
- £100 automatic penalty immediately after 6 July.
- A further £300 at three months late.
- Another £300 at six months late.
- Daily penalties of £10 per day may apply from nine months late.
Penalties apply per scheme, so a company running several non-tax-advantaged arrangements faces separate penalties for each unfiled return.9GOV.UK. Check How to Deal With an Employment Related Securities Penalty The exposure adds up fast. A calendar reminder for mid-June is the cheapest piece of compliance a company can put in place.