Changes to company share option plans

To encourage growth in the UK economy, the treasury has proposed to relax rules for company share option plan (CSOP) equity incentives, to make them both more generous and available to a wider range of companies. Could this be the start of a wider policy change to further encourage employee ownership?

CSOP in outline

The CSOP has, since its inception, offered potential tax advantages for employees granted options over shares with a maximum market value at the date of grant of £30,000 per employee. The tax advantages include:

• any growth in value being free of income tax and National Insurance contributions (NICs) for the employee;
• employer NICs savings; and
• valuable corporation tax deductions for the employer on exercise of the options.

However, the £30,000 limit is typically viewed as less generous compared to that of other tax advantaged company share plan regimes, including, for example, the enterprise management incentive (EMI) scheme, which has a maximum market value of shares subject to option of £250,000 per employee (again, valued at the date of grant).

What is set to change

To encourage use of CSOPs, the government has announced a proposal that, from 6 April 2023, the maximum value of shares that may be subject to options in a CSOP will be doubled to £60,000 per employee. This will be a welcome change for employers looking to incentivise employees.

Another proposed change is the relaxation of the rules regarding the type of shares which qualify for CSOP status. Under the existing rules, and until 5 April 2023, shares must be in a share class that is ‘worth having’ to qualify. Broadly, this means the shares must either be:

• ‘open market shares’, the majority of which are held by outside investors; or
• part of a class of shares that gives employees control of the company.

In practice, this rule has meant that many companies that would otherwise benefit from the plan were excluded. For example, neither of the above requirements would be met where the founders of the business or third-party investors hold a different class of share to the employees.

Under the proposals, from 6 April 2023 onwards this rule will be removed, potentially making the scheme available to a much wider number of employers and their employees.

These changes come in the context of a previous treasury call for evidence regarding share plans, and a government agenda focused on growth. Could this be the start of a broader change to increase the availability and generosity of, and participation in, employee share plans?

Why does it matter?

Employee share plans bring another level of engagement to a company’s workforce, with rewards for both the company and participating employees. They can often provide a cost and tax efficient mechanism to assist in recruiting, retaining and incentivising employees, and can act as an important differentiator for employers in a competitive labour market.

Several tax advantaged share plans are available to companies where relevant requirements are met. The CSOP is only one of them and it is important to consider the options to identify suitability, but employers may now wish to consider the CSOP scheme again in light of these proposed changes.

The government and HMRC appear to be looking to encourage the use of tax advantaged company share plans, so perhaps now is the time to consider benefiting from this valuable incentivisation tool.

For more information, please get in touch with Joe Pickering or your usual RSM contact.