What is a Company Share Option Plan (CSOP)?

A Company Share Option Plan is a tax-advantaged share scheme under which a company may  grant  options to employees and full time directors. While shares give the recipient immediate ownership of a portion of the company,  options offer the possibility to make your money go much further. A CSOP allows  an employee or full time director to pay for  shares in the company in the future for a fixed price.

The options must be granted at market value. When the options are exercised this will be the price the employee/full time director pays for the shares.

Who is eligible for a Company Share Option Plan?

• Companies

If you are a UK private or listed company, then you are eligible for a CSOP. Foreign companies operating in the UK are also sometimes eligible. Private businesses will need to agree on the  market value of the shares with HMRC before granting options.

There are few eligibility requirements for companies to operate a CSOP While EMI schemes require companies to have fewer than 250 employees, there are no employee number limits. Additionally, companies that are based overseas can offer option plans to their UK employees as part of their compensation package.

• Employees or directors

Company Share Option Plans are offered to their employees or full-time directors on a discretionary basis. However, they cannot have a material interest in the company of 30% or more.

An employee can be full-time or part-time, but a director must be full-time.

What are the advantages of a Company Share Option Plan?

• Options can deliver extremely high returns.
• Exempt from Income Tax and National Insurance Contributions on the capital gain when the options are exercised (turned into shares).
• Employee hard work is rewarded tangibly – if the company does well, the stock price rises.
• Share schemes are a proven way of incentivising employees and can result in high-performing companies.
• There are no limitations on the number of employees a company must have. It’s a great option for larger or listed companies.
• Small, un-listed companies with a strapped budget can offer employees an incentive. They won’t need to pay for the shares until the option is exercised.
• Your company may  be eligible for Corporate Tax deduction equal to the employee’s  gains.

What are the limitations of a Company Share Option Plan?

• The options must be granted at market value or higher. They cannot be acquired for lower.
• There is a limit on the maximum value of options an individual may hold, being £60,000. This was £30,000 before 6 April 2023.
• Gains made by the individual are only exempt from Income Tax and NICs if the options are held onto for at least 3 years.

What are the tax implications of a Company Share Option Plan?

The employee or director who acquires the options does not have to pay Income Tax and National Insurance contributions on gains made, provided that they do not exercise those options within 3 years. However, if they have held onto their share options for over 10 years, then they will be liable for Income Tax and National Insurance contributions.

The recipient will also be liable for Capital Gains Tax if they sell their shares. They will be taxed on the difference between the exercise price and the price the shares are sold for.

There are a few circumstances in which the recipient will benefit from the Income Tax and National Insurance exemption, such as:

1. The options are exercised within 6 months after leaving the company due to retirement, redundancy, disability, and injury, provided your scheme rules allow it.
2. In the event of death, the options are exercised by the recipient’s family or other representatives within 12 months.
3. The options are exercised within 6 months of a company takeover.

Companies can also claim a deduction of Corporation Tax for the amount an employee gains from turning their options into shares on the exercise of the option.

What are the filing requirements for a Company Share Option Plan?

When the options are first granted, you must let HMRC know. The CSOP scheme must be registered with HMRC by the 6 July for the tax year in which the options were granted. For example, if an employee was granted a CSOP option on the 11 April 2024, the CSOP scheme must be registered and a CSOP annual return must be submitted on or before the 6 July 2025.

The CSOP annual return will need to be submitted following the close of each tax year by the 6^th July. It will include any CSOP activity that occurs in the tax year, such as options granted, exercised, cancelled, lapsed and released.

How Finerva can help

Our team of tax specialists is expertly equipped to help implement a Company Share Option Plan scheme. We offer extensive support, including acquiring the relevant documentation, HMRC compliance   application, and management.

Dealing with share schemes is a huge responsibility – it has to work for the business and the employees. Consulting directly with tax experts and legal advisors takes the pressure off and gives you the confidence that you’re working with a team of trusted experts. For more information about Company Share Option Plans, get in touch today.