Employment tax

Company Share Option Plans: key changes to the rules

28 March 2023

It was announced during the mini budget in September 2022 that the scope of Company Share Option Plans (‘CSOPs’) was to be expanded from 6 April 2023. This means that more companies may wish to consider implementing a CSOP from this date or grant further options under their current CSOP.

What is a CSOP?

CSOPs are tax advantaged arrangements under which companies can grant share options to selected employees. CSOP options give employees the right to buy shares in the company at a fixed price, at a specified time. Companies can choose which employees they would like to grant CSOP options to, and the level of those awards (subject to a maximum limit). In this way, it can be used as an effective incentive mechanism for key employees.

CSOPs are often particularly attractive to companies that do not qualify to grant Enterprise Management Incentive (‘EMI’) options, which are not available to companies above certain size limits and are only available to companies or groups undertaking a qualifying trade. There are also several conditions that a company must fulfil in order to qualify to grant CSOP options, however, these are generally less restrictive than the conditions attached to EMI options.

The changes due to be made on 6 April 2023, will see a further relaxation of the CSOP rules, making the scheme not only more accessible, but more attractive for many companies.

CSOP changes from 6 April 2023

From 6 April 2023, there are set to be two changes to the CSOP rules. These are:

  • an increase in the maximum market value of shares under option at grant; and
  • a relaxation over the share class over which options can be granted.

Change one: increase in value

The market value of shares under option at grant per employee is set to double from £30,000 to £60,000 on 6 April 2023.

Many companies have previously been deterred from implementing a CSOP, as they believed it did not enable them to provide sufficient value to employees, particularly in comparison to an EMI scheme that has a limit of £250,000 per individual. The 100% increase in the CSOP limit is likely to encourage more employers to set up a CSOP because they can incentivise employees with a more attractive reward. As this limit relates to the value of shares at the date of grant of the option, the value of shares ultimately delivered on exercise could be significantly higher than this limit.

Change two: change to share class

Under the current rules, CSOP options must be granted over shares that are either ‘open market’ shares or ‘employee control’ shares. This essentially means that either the majority of the share class over which CSOP options are to be granted have been obtained other than by reason of employment, or alternatively it means that employees and directors control the company by way of their holdings of the class of shares over which CSOP options are to be granted.

This requirement has historically made it challenging for companies with several share classes, or companies with external investors, to implement CSOPs. However, the proposed removal of this requirement from 6 April 2023 should make CSOPs more accessible for many companies that were previously unable to meet this requirement.

Tax treatment of CSOP options

When CSOP options are granted, there are no tax implications. In order to obtain the maximum tax advantages from a CSOP option, there must generally be at least three years between grant and exercise, with no tax or National Insurance Contributions (‘NICs’) arising in this case. If an option is exercised within three years of grant by a ‘good leaver’ on cessation of employment, or in certain limited circumstances where there is a change of control of the company over whose shares the CSOP options are granted, there should still be no income tax or NICs arising. If the above conditions are not met, income tax and NICs via PAYE will usually arise upon the exercise of a CSOP option.

Upon the sale of shares acquired under a CSOP option, a capital gain will usually arise. The chargeable gain is usually calculated based on the proceeds receivable less the exercise price paid to acquire the shares and any income tax paid upon exercise. Based on 2023/24 tax rates, the arising gain would be subject to tax at 10% or 20%. Employees may also be able to utilise their annual exemption if not already utilised in the tax year, which is reducing to £6,000 for 2023/24 and £3,000 from 2024/25.

Upon the exercise of options under a CSOP, the employer company should typically be eligible for a corporation tax deduction equal to the employee’s gain. This is a significant benefit to an employer, given that the gain itself would not usually be subject to income tax or NICs.

Why should companies revisit CSOPs?

As discussed above, CSOPs are a tax efficient method of incentivising selected employees. In addition to the tax benefits for employees, a CSOP can be a tax efficient incentivisation route for companies, too.

Both companies that have a CSOP in place and those that don’t may wish to consider the following when considering granting CSOP options:

  • The changes over the restrictions on the shares which CSOP options may be granted over may mean that companies that were previously unable to grant CSOP options will be able to from 6 April 2023.
  • The increase to the CSOP grant limits may mean that companies with CSOPs already in place will want to grant further CSOP options to make use of the increased grant limits from 6 April 2023.
  • The increase to the CSOP grant limits may mean that companies that had previously disregarded a CSOP given the fairly low grant limits per employee may now wish to consider implementing one.
  • Current market conditions may mean that the value of the company’s shares is lower at present, meaning that a larger number of shares could be granted to employees under option without breaching the grant limits at the current time.
  • Companies that have breached or are close to breaching the EMI limits may wish to consider implementing a CSOP to continue incentivising employees.

How we can help

At RSM, we have a team of share plan specialists who have a breadth of experience in implementing equity incentive plans.

For more information on CSOPs or share plans in general, please get in touch with Laura Marks or Martin Cooper.