One of the (few) surviving provisions from the September 2022 ‘mini budget’ is the announced change to the maximum value of shares, per individual, that can be placed under option for the tax-advantaged company share option plan (CSOP). For options granted on or after 6 April, the limit per individual will double to £60,000. 

Additionally, a technical change to the types of shares over which options can be granted (removing the so-called ‘worth having’ restriction) also takes place for options granted on or after 6 April 2023. This should allow more companies that have multiple share classes to grant options under CSOP.

This should be great news for companies looking to provide tax-efficient share incentives to their employees, especially growing companies that no longer qualify to issue options under an enterprise management incentive (EMI) plan.

Tax advantaged nature of CSOP

Although there are specific (and, at times, complex) conditions that must be met (by both the company and employee) for a company to grant options under CSOP, the tax advantages are numerous. 

There is no tax at grant. At the date of exercise of the option there will usually be no income tax or national insurance contributions (NIC) due on any ‘option gain’ (ie, the amount by which the market value of the shares acquired exceeds the exercise price). Instead, capital gains tax (CGT) will generally apply at the date the acquired shares are sold. With current tax rates, this can represent a significant saving for the employee. The lack of employer’s NIC also means a tax-efficient result for companies, especially when combined with the potential corporation tax deductions available (including, unusually, for set-up costs).

Type of companies that qualify for CSOP

The qualifying conditions for CSOP options are less onerous than those for (the more generous) EMI options. While companies must be relatively small to qualify for EMI purposes, no such restriction applies to qualify for CSOP. This means that CSOP are often a great choice for companies that have expanded and no longer meet the EMI criteria.

Listed or unlisted companies can qualify for CSOP. If unlisted, the company must be independent and not controlled by another company. An exception to this rule applies if the company is a corporate trustee of an employee ownership trust.

In addition, CSOPs can be good for those businesses whose trade excludes them from implementing EMI schemes.

As a discretionary (rather than all-employee) scheme, companies are able to choose which employees they would like to grant CSOP options to.

Benefit of CSOP scheme from April 2023

The current limit of £30,000 worth of shares under option per individual appears has been blamed for preventing some companies setting up CSOPs.

With the limit doubled, CSOP options can be granted over shares with a maximum value per individual of £60,000, making them much more attractive to companies and their employees. 

The current ‘worth-having’ condition means that companies with multiple classes of shares can only issue shares under CSOP if the options are over shares of a class that is either: 

• ‘employee-control shares’ (ie, shares that, together, give the employees and directors control of the company); or 
• shares of that are ‘open market shares’, which means the shares are held by non-employees and non-directors. 

This restriction often prevents private companies from implementing the scheme, for example if they have multiple share classes or are private equity backed. The removal of the worth-having restriction should open the possibility of CSOP to many private companies for the first time. 

Why it’s time for companies to review their current share plans

If a company currently operates a share incentive scheme or is considering which share scheme would be most appropriate, but is unlikely to qualify to issue options under an EMI tax-advantaged scheme (or has previously not been able to qualify for CSOP due to multiple share classes), CSOP could be a very rewarding plan to implement. 

Companies currently operating a CSOP share incentive scheme may now be able to issue further tax-advantaged options with the increased limit. Even if a company has turned to other share incentive schemes, such as growth shares, joint share ownership plans and non-tax advantaged share option plans, this is an opportunity to review and potentially reconsider its current share incentive scheme(s). 

Why it would make a difference

CSOP options are tax efficient for employees and employers, as there is no income tax or NIC liability arising, subject to conditions being met.

Corporation tax relief is available for employers on the gain an employee makes on exercise and employers can gain confidence of the value of the underlying shares on the tax position undertaken with the agreement from HMRC.

Karen Johal, Senior Consultant, Employment Tax and Reward, FTI Consulting