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

In This Article

1. Equity Incentives: Growth Shares Explained
2. The Problem with Unapproved Share Options
3. Growth Shares: The "Blossoming" Alternative
4. Key Considerations and Risks
5. Protect Your Equity While Rewarding Your Team
6. Ready to Retain Your Superstars?

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 £120m in gross assets or 500 or more employees are ineligible (limits raised in April 2026). 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.

What are Growth Shares?

Growth Shares are a special class of shares that only acquire value if the company's worth grows above a specific, pre-agreed threshold (the "hurdle"). They ring-fence the current value for existing shareholders while incentivising new employees to drive future growth.

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%.

Comparison: Unapproved Options vs. Growth Shares

The Tax Efficiency Gap: The critical difference lies in taxation. Unapproved Options are taxed as Income (up to 45%) plus National Insurance, which can significantly erode the employee's return. Growth Shares are taxed as Capital Gains (18%–24%) with zero National Insurance liability, making them far more tax-efficient for high-growth exits.

Key Considerations and Risks

While powerful, Growth Shares require careful implementation to ensure they are robust against HMRC scrutiny.

Valuation is Critical

You cannot cut corners. A professional valuation is essential to justify the low initial price of the growth shares. If HMRC deems the shares were undervalued at issue, they will charge Income Tax on the difference.

The "Hope Value"

HMRC may argue that even with a hurdle, the shares have "hope value" (the potential for future payout). To mitigate this, the hurdle is often set at a premium (10-20%) above the current market value.

Section 431 Election

Bonus Tip: You and your employee should sign a Section 431 Election within 14 days of issuing the shares. This elects to pay any small Income Tax liability upfront on the "unrestricted" market value. It prevents a much larger proportion of the future gain from being dragged back into the Income Tax net upon sale.

Q1: Can I use Growth Shares in any industry?

Yes. Unlike EMI, Growth Shares are not restricted by industry, company size, or gross assets. They are a flexible tool available to any private limited company.

Q2: Do Growth Shares dilute my ownership?

They dilute your percentage of the future equity, but they protect your current economic value. You do not give away the value you have already built; you only share in the value the new employee helps to create.

Q3: What happens if the employee leaves?

You can build "Leaver Provisions" into the company Articles or a shareholders' agreement. This typically forces the employee to sell their growth shares back to the company (often at nominal value) if they leave, ensuring equity remains with active contributors.

Common Questions About Growth Shares

Can I use Growth Shares in any industry?

Yes. Unlike the EMI scheme, which excludes industries like banking, property development, and hospitality, Growth Shares are available to any private limited company regardless of trade, gross assets, or number of employees.

Do Growth Shares dilute my ownership?

They dilute your percentage of the future equity, but they protect your current economic value. The "hurdle" mechanism ensures you do not give away the value you have already built; you only share in the new value the employee helps to create.

What happens if the employee leaves?

You can protect the business by building "Leaver Provisions" into the company Articles or shareholders' agreement. This typically forces the employee to sell their Growth Shares back to the company (often at nominal value) if they leave, ensuring equity remains with active contributors.

Try Our EMI Option Vs. Growth Shares Calculator →

Protect Your Equity While Rewarding Your Team

Stop giving away your hard-earned value. Our Growth Share design service helps you build an incentive scheme that is tax-efficient and commercially secure.

• ✓ Set the Perfect Hurdle with a valuation that protects existing wealth and incentivises growth.
• ✓ Avoid Income Tax Pitfalls with robust valuation defence and Section 431 elections.
• ✓ Retain Control with bespoke leaver provisions and voting rights structure.

Use our planning assessment to design a Growth Share scheme that fits your business goals.

Ready to Retain Your Superstars?

If EMI isn't an option, Growth Shares are the smart alternative. Our tax team specialises in structuring these schemes to ensure they deliver real value to your employees without exposing them to punitive tax rates.

Click below to assess your eligibility and start building your Growth Share strategy.

Start Your 90-Second Assessment →

Specialist equity incentive advice for UK private companies.