UK Company Share Option Plans

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The Company Share Option Plan (CSOP) in the UK is a tax-advantaged share scheme that allows companies to grant options to any employee or director.
What are the main aims and objectives?

The main aims and objectives of CSOP are primarily to attract, motivate, and retain talented employees or directors. By offering them the opportunity to acquire shares in the company, it aligns their interests with those of the company and its shareholders. This encourages employees to contribute to the company's success, as they could directly benefit from any increase in the company's share price.

How does the program work?

The CSOP is a tax qualified discretionary share option plan which allows companies to grant options to their employees or directors. These options enable the holders to acquire shares at a certain price, typically higher than the market value when the options were granted. The maximum value of shares that a participant can hold through CSOP options is £60,000 (£30,000 for options granted before April 2023).

Tax benefits:

  • No income tax or national insurance contribution (social security) on grant
  • No income tax or national insurance contribution on exercise providing conditions are met
  • Capital gains tax on the sale of the option shares with no minimum holding period
  • The company will typically also qualify for a corporation tax deduction equal to the spread for the accounting period in which the option was exercised

Conditions:

  • The option must be exercised within 10 years of grant and;
  • At least three years after the grant date; or
  • Within six months of cessation of employment for certain “good leaver’ reasons (such as injury, disability, redundancy or retirement)
  • By the participants personal representatives within 12 months of death; or
  • Within 6 months of certain cash takeovers.

Gains made on the sale of the option shares above the original price are subject to capital gains tax which is set at 20% with an annual exemption threshold of £6,000.

Company share option plans (CSOPs) can be set up by any independent company, irrespective of size. The company must either 'stand alone' (i.e. not be controlled by another company), or must be a subsidiary of a listed company. In the latter case, a CSOP may be suitable for a UK subsidiary of an overseas parent, whereby the UK participants are granted options in the overseas parent. There is no requirement that it carry on a qualifying trade. Any full- or part-time employee or full-time director can participate, provided they do not own more than 25% of the company. The company can choose which employees are to be entitled. Furthermore, starting from April 2023, companies with multiple share classes will also be able to use CSOP options.

Eligibility

Company share option plans (CSOPs) can be set up by any independent company, irrespective of size.

The company must either 'stand alone' (i.e. not be controlled by another company), or must be a subsidiary of a listed company. In the latter case, a CSOP may be suitable for a UK subsidiary of an overseas parent, whereby the UK participants are granted options in the overseas parent.

There is no requirement that it carry on a qualifying trade.

Any full- or part-time employee or full-time director can participate, provided they do not own more than 25% of the company. The company can choose which employees are to be entitled.

What is the overall cost?

CSOP costs £40 million per year in lost revenue through income tax and national insurance contributions.

How was it implemented?

CSOP was introduced in 1996 and is administered by Her Majesty’s Revenue and Customs (HMRC) which is a non-ministerial department of the UK Government responsible for the collection of taxes. The maximum value of shares that a participant can hold through CSOP options was raised from £30,000 to £60,000 in April 2023.

CSOP is one of four main tax-advantaged employee share schemes available in the UK. The other schemes are: save as your earn scheme (SAYE), Share Incentive Plans (SIPs), Enterprise Management Incentives (EMI).

What impact has been measured?

An impact assessment commissioned by HMRC of CSOP, SIP and SAYE in 2021 found that:

  • More than 1,200 companies have operated one of the three schemes since 2015
  • 778 of these companies offer CSOP, making it the most popular scheme
  • £180 million worth of options have been granted through CSOP
  • £80 million worth of options have been exercised through CSOP
  • Out of all surveyed companies that are aware of being registered for CSOP, SIP or SAYE, 81% indicated an improvement in employment and/or business outcomes
  • 74% of companies surveyed reported a positive impact on recruitment and/or staff retention (69% for staff retention and 48% for recruitment.
  • Being registered for CSOP has a positive impact on turnover with registration in the scheme being associated with a 7.1% higher turnover than firms in the control group
  • Registering in CSOP had no statistically significant impact on the number of employees
  • There is some evidence of a positive impact of share schemes on employee saving behavior
What lessons can be learned?

Business advisors have cited the following CSOP advantages from the perspective of entrepreneurs:

  • It encourages long-term commitment from participating employees.
  • For start-ups and SMEs, it offers them a way to offer equity to attract key employees or directors, while preserving cash reserves.
  • The employing company can claim a deduction against corporation tax for the full amount of the financial gain provided to employees who exercise their options.
  • Scheme shares may be non-voting, and the company may require that employees must offer their shares back if they leave. However, no further restrictions can apply.

In addition to this the HMRC evaluation found that:

  • Awareness of the schemes was limited with 55% of firms reporting that they were unaware of having operated one of the schemes in the last 10 years
  • Companies typically opt into share schemes to improve employment outcomes with the most popular motivation being to create a feeling of ownership (50%), help retain staff generally (32%), retain skilled employees (24%), attract skilled employees (21%) and improve staff morale (26%).
  • Employees mostly participated in share schemes in order to save.
  • Non-claimant companies perceived the process of setting up and administering the scheme as complicated and difficult and consequently saw this is a major barrier to participating
  • In particular some small companies felt the scheme was not suited to them due to challenges relating to controlling interest, financial risk to employees, valuing company shares or liquidity issues when buying back shares.

CURATED BY

Cristina Fernandez

Director for Knowledge + Programming
Global Entrepreneurship Network
United States