Many UK employees build up a valuable shareholding in their employer through schemes such as Enterprise Management Incentives, Save As You Earn, and Share Incentive Plans. When those shares are eventually sold, the Capital Gains Tax treatment depends heavily on which scheme was used and how the shares were acquired, making this one of the more commonly misunderstood areas of personal tax.
Enterprise Management Incentive Options
EMI options are a popular scheme for smaller, high-growth companies. Provided the options are granted at or above market value and the qualifying conditions are met, exercising an EMI option does not usually trigger an Income Tax charge. When the shares are later sold, any gain is generally subject to Capital Gains Tax, and if you have held the option or shares for the required period and meet the other conditions, Business Asset Disposal Relief may reduce the rate to 18 percent on qualifying gains.
Save As You Earn Schemes
SAYE schemes, often called Sharesave, allow employees to save a fixed monthly amount over a set period in exchange for the option to buy shares at a discounted price fixed at the start of the scheme. There is generally no Income Tax charge on exercising the option. Capital Gains Tax applies when the shares are eventually sold, calculated on the difference between the sale proceeds and the discounted price actually paid, not the market value at the time of exercise.
Share Incentive Plans
Share Incentive Plans allow employees to acquire shares directly through payroll deductions, sometimes matched by additional free or matching shares from the employer. Shares held within a Share Incentive Plan for at least five years can be sold with no Income Tax or Capital Gains Tax charge at all, since the shares are held in a tax-advantaged trust structure throughout that period. Selling before the five-year point can trigger Income Tax, though it does not usually affect the Capital Gains Tax position separately.
Unapproved and Discretionary Share Schemes
Not all employee share arrangements are tax-advantaged. Where shares or options are granted outside of a formal HMRC-approved scheme, an Income Tax charge often arises at the point the shares are acquired or the option is exercised, based on the difference between market value and the price paid. Capital Gains Tax then applies separately to any further growth in value between that point and the eventual sale, meaning employees can face both Income Tax and Capital Gains Tax on different portions of the same overall gain.
Establishing Your Base Cost
Correctly identifying your base cost for Capital Gains Tax purposes is essential and varies significantly by scheme: it may be the price actually paid, the market value on which Income Tax was already charged, or a combination of both across shares acquired at different times through repeated participation in the same scheme. Keeping scheme documentation and payslips showing any Income Tax already paid is essential to avoid being taxed twice on the same value.
Conclusion
Employee share schemes can be a valuable way to build wealth, but the Capital Gains Tax treatment on eventual sale depends heavily on which scheme was used, when shares were acquired, and how long they were held. Understanding your specific scheme rules before selling, rather than assuming all employee shares are taxed the same way, can prevent an unexpected and avoidable tax bill.
People Also Ask
Do I pay Capital Gains Tax on shares from a Share Incentive Plan?
Not if the shares are held within the plan for at least five years, after which they can generally be sold free of both Income Tax and Capital Gains Tax.
What is my base cost for SAYE shares?
Generally the discounted price you actually paid under the scheme, not the market value of the shares at the time you exercised the option.
Can I get Business Asset Disposal Relief on EMI shares?
Potentially, yes, provided the qualifying conditions specific to EMI shares and the general relief conditions are both met.
