Introduction to Non-Tax Advantaged Options

Share option schemes are an excellent addition to an employee’s remuneration package. They’re a popular method for incentivising, rewarding, retaining, and attracting employees. There are three common share option schemes: Enterprise Management Incentive (EMI), Company Share Options Plan (COSP), and Non-tax advantaged option scheme, which is commonly referred to as the Unapproved Share Option scheme.

There are benefits to all schemes, but the EMI and CSOP schemes have stricter regulations to comply with. On the other hand, a Non-tax advantaged option scheme has fewer regulations to comply with and so can be better tailored to suit your business’s needs.

What is a Non-tax advantaged option scheme?

If your business does not qualify for tax-advantaged share schemes (such as EMI and CSOP), or if their regulations are too restrictive, then you can opt for a non-tax advantaged option scheme. Regulations and limitations for a tax-advantaged option scheme may include:

• A maximum entitlement of the value of options granted
• Options must be granted at market value or higher
• Limits on number of employees (EMI)
• Time frame on when options can be exercised (turned into shares)
• Employees/directors must work at the company for X hours per week

How Non-tax advantaged options work

Employees are granted the option to acquire shares at a future date for a fixed price. The future date might be specified, or it might be within a certain time frame. As the rules for non-tax advantaged options do not need to be cleared with HMRC, that time frame is up to the company’s discretion. The employees that can be granted options are also up to the company’s discretion. While there is no statutory restriction on employee participation, companies are free to impose restrictions on the level of participation for an employee. They can also decide on the overall percentage of share capital.

When the options are turned into shares, this is referred to as ‘exercising options’.

Tax treatment

While EMI schemes and company share option plans benefit from no income tax and National Insurance contributions provided certain conditions are met, non-tax advantaged options do not. This is the main difference between non-tax advantaged options and tax advantaged options.

When options are granted to employees, there is no tax to pay at that time. However, when the options are exercised, the market value at the time of exercising would ideally be a lot more than the exercise price. Therefore, the employee must pay income tax on the difference between the exercise price and the market value of the shares at the time of exercise. National Insurance contributions will be due if the underlying share is a readily convertible asset (RCA) at the date of exercise. An RCA refers to shares that have a ready market or buyer. 

Capital Gains tax is due for both tax advantaged options and non-tax advantaged options when the shares are sold, the rate to be applied depends on the employee’s tax bracket and the scheme which the options were granted under.

In terms of the company’s tax treatment, no tax is due when granting the option to an employee. When the option is exercised, employers’ NICs will be due if the underlying share acquired is an RCA. 

Like with tax-advantaged schemes, companies may qualify for a corporation tax deduction equal to the amount liable to income tax on the employee and the employer’s NICs paid.

What are the benefits of non-tax advantaged options?

With other options available, why choose a plan without tax advantages? Benefits include:

• The options plan is available to any business
• There are fewer regulations and limitations meaning the share plan can be tailored to better suit your business.
• The options plan is available to any employee or director
• Companies can ‘top up’ other benefits with non-tax advantaged options

Essentially, if the rules or restrictions do not suit a business, then there is an alternative option. Share option schemes are a great incentive for employees and are proven to encourage high-performing companies.

How Finerva can help

Our team of tax specialists is expertly equipped to help implement a non-tax advantaged option scheme where appropriate. We offer comprehensive and actionable support, including acquiring the relevant documentation, application, management and compliance with HMRC where necessary. Dealing with share schemes is a huge responsibility – it must work for the business and the employees. Consulting directly with tax experts and legal advisors takes the pressure off, giving you the confidence that you’re making the right choice for your employees and your business. For more information about non-tax advantaged option schemes, get in touch today.