Company Share Option Plans (CSOPs) are a type of tax-advantaged employee share scheme, through which companies can grant selected employees and directors the option to acquire up to £60,000 of shares at a predetermined price at some point in the future.
CSOPs are flexible, discretionary, and exempt from Income Tax and National Insurance if certain conditions are met. They are ideal for larger businesses that do not qualify for Enterprise Management Incentives, as well as established family companies and owner-managed firms.
Below, we provide a basic overview of Company Share Option Plans, including the key features and eligibility requirements, the benefits to employees and employers, and how to provide notice of the scheme to HMRC.
A Company Share Option Plan is one of four types of direct tax-advantaged employee share schemes approved by HMRC – the others being Save As You Earn (SAYE), Share Incentive Plans (SIPs), and Enterprise Management Incentives (EMIs). Tax-advantaged simply means that the share plans provide certain tax benefits.
Designed to incentivise and reward valuable individuals, the key features of Company Share Option Plans are as follows:
Whilst not quite as tax-efficient as Enterprise Management Incentives , Company Share Option Plans are a great alternative for companies that have outgrown their EMI scheme or do not meet the eligibility criteria to offer one.
In relation to CSOP schemes, a person has a material interest in a company if they hold more than 30% of the ordinary share capital or assets of the company.
As per the Income Tax (Earnings and Pensions) Act 2003 ( paragraph 9 ), an employee or director is not eligible to participate in a CSOP scheme on any date if they and/or their associates currently have, or have had in the previous 12 months, a material interest in the company.
Company Share Option Plans offer generous tax reliefs. Employees and directors who are granted share options do not have to pay Income Tax on National Insurance contributions (NIC) on the appreciated value of their shares if they exercise their options within 10 years of the grant date and:
In all other circumstances, the individual will be liable to Income Tax and NIC on any increase in the value of their shares between the exercise price they paid and the actual market value of the shares on the date they exercise their options.
If and when the individual sells their shares in the future, they will be required to pay Capital Gains Tax on any profit (gains) they make. The capital gain will be the increase in the market value of their shares between the date the options were granted and the date the shares were sold – i.e. the difference between the price they paid for the shares and the price they sold them for.
There is also a tax benefit for companies. Generally, they will qualify for a Corporation Tax deduction when an employee exercises their options. The tax relief the company can claim against its profits will be equal to the amount of Income Tax relief enjoyed by the employee.
Offering Company Share Option Plans is an effective way for businesses to attract, incentivise, and retain valuable employees and directors. Together with generous tax reliefs, this type of scheme can help to align the interests of the employer and employee.
The individual enjoys a sense of ownership, and they are directly rewarded for their continued contribution to the company’s growth prospects and long-term success. As a result, the company itself benefits from a more committed, motivated, and engaged workforce.
Compared to Enterprise Management Initiatives, Company Share Option Plans are available to a wider range of businesses. There are also fewer rules for participants. Moreover, employers can grant options on a discretionary basis to the most valuable individuals, with varied rights and enhanced restrictions attached where necessary.
Previously, companies had to apply to HMRC for formal approval of Company Share Option Plans. This requirement has now been replaced with a self-certification procedure, making it much easier and quicker for companies to establish and register this type of employment-related securities (ERS) scheme.
To self-certify, a company must give notice of the scheme through HMRC’s ERS Online Service, declaring that the CSOP meets the conditions set out in Schedule 4 of the Income Tax (Earnings and Pensions) Act 2003. This must be done on or before 6 July following the end of the tax year in which the first options are granted.
Once registered, the company will also be required to submit an ERS return to HMRC every year until the scheme ceases.
Detailed guidance on CSOP registration and reporting requirements is available from HMRC. General guidance on establishing Company Share Option Plans can be found in The Employee Tax Advantaged Share Scheme User Manual .
If you are considering setting up a Company Share Option Plan or any other type of employee share scheme, we recommend speaking to a solicitor, accountant, or financial planner for expert advice.
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