Stuck with Share Options? Why Growth Shares Might Be Your Answer

Equity Incentives: Growth Shares Explained

Recruiting a “superstar” employee is a major win for any business, but retaining them is the real challenge. To keep key talent motivated and aligned with your company’s long-term success, you need a robust incentive strategy. For many UK SMEs, the default choice is the Enterprise Management Incentive (EMI) scheme.

However, not every business qualifies for EMI. Certain industries (like hospitality, property development, and financial services) are excluded, and companies with over £30m in gross assets or 250+ employees are ineligible. If you find yourself “stuck” without access to EMI, simply defaulting to unapproved share options can lead to a nasty tax surprise for your employees.

This guide explores Growth Shares, a flexible, tax-efficient alternative that can function as the “cooler cousin” of traditional share options. We will break down how they work, how they differ from ordinary shares, and why they might be the perfect fit for your retention strategy.

The Problem with Unapproved Share Options

When EMI is off the table, many business owners turn to unapproved share options. These grant employees the right to buy shares at a future date (typically upon an “exit” like a sale) at a fixed price. While simple to set up, they come with a significant tax disadvantage:

• Income Tax Trap: Any gain made between the grant price and the sale price is taxed as Income Tax (up to 45%), not Capital Gains Tax.
• National Insurance: Both the employee and the employer may be liable for National Insurance Contributions (NICs) on the gain, further reducing the net reward and increasing company costs.

This tax treatment can severely blunt the incentive, leaving your superstar with far less than they might expect.

Growth Shares: The “Blossoming” Alternative

Growth shares solve the tax inefficiency of unapproved options by structuring the reward differently. Instead of an option to buy later, employees purchase (or are gifted) a special class of shares immediately.

The “Hurdle” Mechanism

The defining feature of a growth share is the hurdle.

1. Valuation Baseline: You value your company today (e.g., £1.5 million).
2. Setting the Hurdle: You issue new shares that only have economic rights to value above a set threshold, often slightly higher than the current valuation (e.g., £1.6 million).
3. Initial Value: Because these shares have no rights to the first £1.6m of value, their current market value is extremely low. This allows employees to buy them for pennies, or pay a negligible amount of Income Tax on receipt.

The Payoff

If the company grows and sells for £3.5 million, existing shareholders keep the first £1.6 million (their protected value), and Growth Shareholders share in the remaining £1.9 million of new value.

Crucially, this profit is taxed as a Capital Gain, currently capped at 24% (or potentially lower with Business Asset Disposal Relief), rather than Income Tax rates of up to 45%.