Employment-related securities (ERS) are shares, share options, loan notes, and other financial securities that an employee or director acquires by reason of their employment. In the UK, HMRC uses ERS as a broad umbrella term covering everything from formal share incentive plans to one-off share awards given to a founding director.
And here's the thing: the tax and reporting rules surrounding ERS are surprisingly wide-reaching. Get them wrong, and you could face penalties, unexpected tax bills, or even lose valuable tax advantages altogether.
So whether you're an employer designing a share scheme, a
tax professional advising clients, or a legal or finance professional, understanding what the equity package actually means for your wallet or your client's is vital.
Let’s break it down clearly.
Why Do Companies Use Employment-Related Securities?
Let's start with the "why" before we get into the "how."
Companies use ERS to attract, retain, and reward their best people. It's a powerful motivator: instead of paying someone a higher salary (which gets taxed at up to 45% income tax plus National Insurance), you may be able to give them a stake in the business. This aligns their interests with the company's success.
When the company does well, they do well.
Think of it like this: would you work harder knowing you'll get a bigger bonus, or knowing you literally own a piece of the company that's growing in value? Many people are often tempted to pick the second option.
For employers, ERS can also be more cost-effective than cash bonuses, particularly when tax-advantaged schemes are used, and the conditions for relief are met. Some schemes even allow the company to claim a
Corporation Tax deduction for the cost of setting up and running the plan.
In essence, companies use ERS to:
- Attract top talent without increasing cash salaries
- Align employee incentives with company performance
- Encourage retention (e.g., vesting over time)
- Reward long-term performance
The Two Categories: Tax-Advantaged vs Non-Tax-Advantaged
Not all ERS are created equal. The UK recognises two broad categories, and the tax treatment between them is dramatically different.
Tax-Advantaged Schemes
These are government-approved schemes that come with built-in tax benefits for both the employer and the employee. There are four main types:
- Enterprise Management Incentives (EMI) — Often called the "gold standard" of share options, EMI is for small and medium-sized companies. Employees can receive options worth up to £250,000, and, provided the options are granted at market value and all EMI conditions are satisfied, there's no income tax or NICs on grant and, in most cases, no income tax or NICs on exercise, with any gain instead subject to Capital Gains Tax.
- Company Share Option Plans (CSOP) — Available to companies of any size, CSOPs allow employees to hold up to £60,000 in unexercised options. If the options are held for at least three years before exercise, and the statutory CSOP conditions are met, there's no income tax or NICs on the gain.
- Save As You Earn (SAYE) — An all-employee scheme where staff save a fixed monthly amount over three or five years, then use the savings to buy shares at a discounted price.
- Share Incentive Plans (SIP) — Another all-employee scheme where companies can give free shares, partnership shares, matching shares, or dividend shares, often with favourable tax treatment if held for a minimum period.
Non-Tax-Advantaged Schemes
Everything else falls into this bucket: unapproved share options, restricted stock units (RSUs), growth shares, joint share ownership plans (JSOPs), and carried interest arrangements. These don't qualify for the tax breaks above, but they offer much greater flexibility. There are no caps on value, no restrictions on company size, and they can be offered to part-time staff, consultants, or overseas employees.
The trade-off?
Income tax and NICs will typically apply when the option is exercised, based on the difference between the market value of the shares and the price the employee paid.
How Are Employment-Related Securities Taxed?
This is where things get interesting, and where mistakes tend to happen.
At the Point of Acquisition
When an employee acquires shares for less than their market value, a tax charge normally arises on the discount. For example, if shares are worth £10 each but the employee pays £3, income tax applies on the £7 difference. If those shares are "readily convertible assets" (i.e., they can be easily sold for cash, like listed shares), National Insurance contributions also kick in.
Restricted Securities and the Section 431 Election
Here's a scenario that catches a lot of professionals off guard. Say you're given shares that come with restrictions: perhaps you'll forfeit them if you leave within three years. Because of those restrictions, the shares are worth less at the time you receive them.
But when the restrictions are eventually lifted, the value goes up, and that increase can be taxed as employment income.
The clever move?
Making a
Section 431 election within 14 days of receiving the shares. This election says: "Tax me on the unrestricted market value right now." If the shares are worth relatively little at the point of acquisition, the upfront tax bill is small, and any future growth gets taxed as a capital gain instead — typically at a much lower rate.
At the Point of Disposal
When shares are eventually sold,
Capital Gains Tax (CGT) applies on any growth in value above the acquisition price (or the value at which income tax was already paid). The standard CGT rates apply, but employees who hold at least 5% of the company's share capital and have owned the shares for at least two years and meet the other statutory ‘personal company’ conditions may qualify for Business Asset Disposal Relief (BADR), which offers a reduced rate of 14% for the 2025/26 tax year (rising to 18% from April 2026) on the first £1 million of lifetime gains.
For EMI shares, the conditions are relaxed: broadly, BADR can apply without a 5% shareholding, provided the option was granted at least two years before the disposal, and other conditions are satisfied.
Two Real-World Examples
Theory is great, but let's see how this plays out in practice.
Example 1: Sarah and the EMI Option
Sarah is a senior developer at a growing fintech company with 40 employees. The company grants her an EMI option to buy 10,000 shares at £2 each — the current market value.
At grant: No income tax. No NICs. Nothing to pay.
Three years later, the company was acquired. The shares are now worth £12 each. Sarah exercises her options, buying the shares at £2 and immediately selling at £12.
Her gain is £100,000 (10,000 shares × £10 profit). Because the EMI qualifying conditions were met throughout, this entire gain is taxed as a capital gain and not employment income. Assuming the relevant BADR conditions are met (including the two‑year holding period for the EMI option and any applicable shareholding tests), she can qualify for BADR at 14%, giving her a tax bill of just £14,000 on a £100,000 gain.
Had this been an unapproved option instead?
The £100,000 would have been taxed as employment income at up to 45%, plus NICs. That's a potential tax bill of over £50,000 for the same economic outcome.
The difference is staggering, and it's exactly why understanding ERS matters.
Example 2: James and the Restricted Share Award
James joins a mid-sized law firm as a partner and is awarded 5,000 shares worth £20 each. However, there's a catch: if he leaves within four years, he forfeits the shares entirely. Because of this "bad leaver" restriction, the shares are valued at just £8 each for tax purposes at the point of acquisition.
Scenario A — No Section 431 election: James doesn't make an election. He pays income tax on the £8 per share value at acquisition (£40,000 total). Four years later, the restrictions were lifted, and the shares are now worth £30 each. The increase from £8 to £30 — that's £110,000 — gets taxed as employment income at his marginal rate. Ouch.
Scenario B — With a Section 431 election: James and the firm jointly make a Section 431 election within 14 days. He pays income tax on the full unrestricted value of £20 per share at acquisition (£100,000 total). Four years later, the shares are worth £30 each. The growth from £20 to £30 (£50,000) is taxed as a capital gain at 20%, not as employment income at 45%.
The Section 431 election costs more upfront but saves James a significant amount overall. It's a strategic decision that depends on how confident you are that the shares will grow in value. And it has a very tight 14-day deadline.
Reporting Obligations: The 6 July Deadline
Now let's talk about the part that trips up employers more than anything else: reporting.
Every UK employer that operates an ERS scheme — or has made even a single one-off share award — must file an annual ERS return with HMRC. The deadline is 6 July following the end of the tax year. For example, the 2025/26 tax year (running 6 April 2025 to 5 April 2026), returns must be filed by 6 July 2026.
Here's what many companies don't realise:
Even if nothing happened during the year — no grants, no exercises, no disposals — you still need to file a nil return for every registered scheme. And you must keep filing nil returns until you formally close the scheme with HMRC.
What Counts as a Reportable Event?
The list is broader than most people expect:
- Granting new share options (under any scheme type)
- Employees exercising, cancelling, or lapsing share options
- Shares awarded or acquired at below market value
- Changes to the rights attached to existing securities
- Lifting of restrictions on restricted shares
- Share-for-share exchanges and corporate reorganisations
- Awards under overseas plans with UK participants (including RSUs and ESPPs)
Even if the transaction doesn't trigger an immediate tax charge, it may still need to be reported.
Penalties for Getting It Wrong
Miss the 6 July deadline and the penalties start stacking up:
An automatic
£100 penalty per scheme if the return (including a nil return) is late, a further £300 if it is more than 3 months late, and another £300 if it is more than 6 months late, with potential daily penalties after 9 months.
For tax-advantaged schemes like CSOP, SAYE, and SIP, failing to register and self-certify the scheme by 6 July can result in the loss of tax-advantaged status altogether. That means your carefully designed share scheme could retroactively become fully taxable.
Not a fun conversation to have with your employees.
Recent Changes Worth Knowing About
The ERS landscape doesn't stand still. A few developments from 2025/26 that professionals should be aware of:
Simplified net settlement reporting: From the 2025/26 tax year,
HMRC has removed the requirement for double-line reporting on net-settled awards. Employers now only need to complete one row of information per individual employee on the "Other" ERS return — a welcome reduction in administrative burden.
Short-term business visitors: HMRC has clarified that where a short-term business visitor is covered by an EP Appendix 4 arrangement, and no UK income tax or NICs are due, there is no longer a requirement to include non-tax-advantaged ERS data for those employees. This guidance applies retroactively to all previous tax years.
EMI expansion from April 2026: The government has doubled the EMI company option limit (from £3 million to £6 million) and quadrupled the gross asset threshold (from £30 million to £120 million), meaning significantly more companies will be able to use EMI going forward.
PISCES platform integration: A new type of stock market for secondary trading of private company shares is being introduced. Existing EMI and CSOP contracts granted before April 2028 can be amended to allow exercise on a PISCES platform without losing tax advantages.
ERS in Practice: A Strategic View
If you work in corporate tax, payroll, or HR within a financial institution, ERS isn't just something that "the equity team handles." The tax implications ripple across multiple areas — from PAYE and NICs obligations, to Corporation Tax deductions, to individual self-assessment returns.
HMRC cross-references ERS data against corporate tax returns, payroll submissions, and individual filings to check for inconsistencies. Getting it right matters.
And for employees?
Understanding whether your share award falls under an approved or unapproved scheme, whether a Section 431 election makes sense, and when your tax points arise can literally be worth tens of thousands of pounds. As we saw with Sarah's EMI example, the difference between getting it right and getting it wrong can be the difference between a 14% tax rate and a 45% tax rate on the same gain.
Ready to Master ERS Tax and Reporting?
Let’s recap:
- ERS = securities linked to employment
- Includes shares, options, and similar instruments
- Subject to income tax, NICs, and possibly CGT
- Requires annual reporting to HMRC
- Mistakes can lead to penalties and tax exposure
If reading this has made you realise there's more to employment-related securities than you thought, then you're not alone. The rules are complex, the deadlines are strict, and the financial stakes are high for both employers and employees.
Redcliffe Training's
Tax and Reporting Implications of Employment Related Securities (ERS) course gives you the practical, up-to-date knowledge you need to handle ERS with confidence.
Whether you're advising clients on share scheme design, ensuring your company's HMRC filings are compliant, or want to understand the tax implications of your own equity package, this course will equip you with the skills to get it right and potentially save thousands in the process.
Secure your place today and turn ERS from a compliance headache into a professional advantage.
FAQ
How do I tell HMRC my employment-related securities scheme has ended?
Notify HM Revenue & Customs by submitting a final Employment Related Securities (ERS) return via the ERS online service. Mark the scheme as “ceased” and include the date of cessation in your return. This is done through your PAYE online account.
You must still file the return by 6 July following the end of the tax year in which the scheme ended, even if no reportable events occurred.