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– the new, improved tax efficient employee share option scheme


From April 2023, qualifying companies will be able to issue Company Share Option Plan (CSOP) options to employees over shares worth up to £60,000 (double the current £30,000 limit) and restrictions around the type of share where there is more than one class in issue (‘the worth having’ restriction) will be removed.  This will better align the scheme rules with the those for the Enterprise Management Incentive (EMI) scheme, widening access to tax-advantaged CSOP for growth companies (including those which have outgrown EMI size limits), venture capital backed companies and others with multiple share classes.

This article sets out the changes to the rules and how they give CSOPs the potential to deliver more value, and a greater tax-advantaged incentive, to employees.

What is a CSOP?

CSOPs are tax efficient share option plans that enable companies of all sizes to make discretionary share option grants enabling employees to acquire shares in their employer or its parent company.

CSOP tax reliefs are generous. Provided the exercise price is at least equal to market value at date of grant, CSOP options can be exercised on or after the third anniversary of the grant (earlier exercises may be allowed in certain ‘good leaver’ or takeover scenarios) without any income tax or NIC.  In addition, employers should receive a statutory corporation tax deduction on exercise equal to the growth in value of the shares from the date of grant.  When employees come to dispose of their shares, they will be subject to capital gains tax on the difference between the price paid to acquire the share on the exercise of the CSOP and the disposal proceeds.  Note that it is possible to agree market value of shares at the time of grant with HMRC so employees and their employer have certainty over the tax treatment at the point of exercise.

CSOPs are available to a wide variety of companies. Unlike EMI schemes, there are no limits on company size, number of employees or company activities for participation in CSOPs.  This means CSOPs can be used by larger companies, listed organisations, and those who carry on activities that would exclude them from implementing an EMI scheme such as property development, banking or legal and accountancy services.

CSOPs are flexible. They are discretionary which means there is no requirement to offer participation to all employees as there is for other HMRC backed schemes – such as Save As You Earn (SAYE) and Share Incentive Plans (SIP).  Note that there are some restrictions on participation by executive directors since they must work at least 25 hours per week to qualify and non-executive directors cannot participate at all.  There are also restrictions for individuals holding a material interest – broadly a 30% shareholding – in a close company.

So far so good, but then we come to the limitations. Under the current rules, there is a £30,000 per employee limit on the value of shares that can be granted under a CSOP (though minority discounts can be applied) and where a company has more than one class of shares then the shares subject to CSOP options must meet the “worth having” condition which requires the CSOP options to be granted over either a class of shares that are either “employee control shares” or ”open market shares”.  In practice, this “worth having” condition often limits CSOPs to companies with only one class of share.

What is changing?

Following a Government review, changes have been announced to the CSOP regime with the stated aim of widening access to CSOP for growth companies.  The two key changes are as follows –

  • Limit on the per employee value of shares subject to CSOP option is doubled to £60,000. This represents a welcome improvement since the limit has not been increased for almost 30 years, significantly eroding the value of the scheme.  It should be noted, however, that the limit remains much higher for EMI options at£250,000
  • The “worth having” condition is being removed – this opens up CSOPs to companies with more than one class of share and potentially enables companies to create a new class of shares specifically for their CSOP

Our view

The changes are to be welcomed – the current £30,000 limit has not been increased for almost 30 years (despite increases in the EMI limit) impacting the real value of the scheme and the relaxation of the rules should mean that CSOPs are likely to become much more attractive to growth companies that become too big for EMI schemes and those companies carrying out non-qualifying activities for EMI purposes,.

For companies that have previously found CSOP inaccessible to them (e.g. owing to their size or activities) or who have exhausted their CSOP limits and have turned to other less tax favourable incentivisation methods, now is the time to reconsider CSOP.

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