CSOPs are improving – how they will work from 2023

It was announced in the Mini Budget that the tax efficient employee Company Share Option Plan (CSOP) will be vastly improved from April 2023, both in terms of the limit on the value of shares that can be granted under option to each individual participant and the restrictive requirements on which shares in a company can be granted under CSOP options.

What is a CSOP and why use one?

CSOP options are tax-efficient discretionary employee share options that are available to companies of all size. While Enterprise Management Incentive (EMI) share options are more tax advantageous than CSOP options, they are only available to smaller companies that carry out certain qualifying trades.  

Nevertheless, CSOP tax reliefs are generous. CSOP options can be exercised without any income tax or National Insurance Contributions (NIC) liability arising provided certain conditions are met (a main condition being that, ordinarily, the options must be exercised more than three years after grant). The UK employing company will generally qualify for a corporation tax deduction on the amount of gains realised by the employees on the exercise of their options.

CSOP: The changes in the Mini-Budget

While CSOP options are widely used, there are a number of limitations of CSOP options and the proposed changes from April 2023 address two of the most significant limitations:

• There is currently a limit of £30,000 per person on the value of shares that can be granted under CSOP option. This limit restricts the benefit of CSOP in many cases, but will double to £60,000 from April 2023, making CSOP options much more attractive to companies and their employees.
• The shares that are subject to CSOP options currently have to meet the “worth having” conditions. These conditions require CSOP options to be granted over either: a class of shares that, overall, control the company; or a class of shares that are held in the majority by investors. In some cases, these “worth having” conditions can mean that private companies in particular do not have a class of share that can be used to grant CSOP options.  This requirement to meet the “worth having” conditions is being removed under the proposal in the mini-budget. This change will make CSOP accessible in some cases for the first time for companies with more than one class of share. It will also make CSOP options possible for the first time for many companies that happen to have multiple share classes, and opens the possibility of a company choosing which of its share classes is most appropriate to grant under CSOP options (which could possibly be a new share class for the CSOP).

What will these changes mean?

CSOPs currently offer employers considerable opportunity to use shares tax efficiently to incentivise employees. Particular attractions of CSOP are:

• Tax-efficiency for option holders – no income tax on exercise, capital gains tax when the underlying shares are sold.
• A facility exists under which the value of the underlying shares can be agreed with HMRC which gives certainty of the tax position.
• Corporation tax relief is available to the employer when CSOP options are exercised.

If your company operates an incentive scheme, you should consider whether these changes should inform changes to your incentivisation strategy. Many companies that are not currently able to grant CSOP options or that have granted options up to the existing CSOP limit (£30,000) have turned to other incentives such as growth share plans, joint share ownership plans and non-tax advantaged share option plans. In future, operating a CSOP may be more attractive than your current scheme.

See our Which share plan tool to help you find the right share plan for your employees.

If you would like further information on using a CSOP or any employee incentive scheme, please contact Andy Goodman, Matthew Emms, David Gardner or Ian Rose.