Employee tax consequences ― company share option plans

Produced by Tolley in association with Ken Moody
Employee tax consequences ― company share option plans

The following Employment Tax guidance note Produced by Tolley in association with Ken Moody provides comprehensive and up to date tax information covering:

  • Employee tax consequences ― company share option plans
  • Grant of option
  • Vesting of option
  • Exercise of option
  • Takeovers
  • Reconstructions
  • Sale of shares
  • Tax on tax charge

The tax rules around company share option plans (CSOPs) are extremely generous, subject to a limit of £30,000 in relation to the total market value of the option shares (measured at the time of grant). This note considers them on a step-by-step basis.

HMRC guidance generally is at ETASSUM40000 onwards.

Grant of option

There is usually no income tax or NIC charge arising on the granting of an employment-related securities option. The exception is where a CSOP option is granted at a discount.

There is a charge to income tax if the total amount that the employee has to pay for the grant of the option, and to exercise the option to acquire the maximum number of shares allowed under it, is less than the market value of the same number of shares of the same class as at that date when the option is granted.

If the total that the employee has to pay is less than that market value, the difference between the two figures counts as taxable employment income of the employee for the tax year in which the option is granted, but does not give rise to any charge to Class 1 NIC.

In practice, such a tax charge is unlikely to arise as an option granted at a discount is unlikely to be within the requirements of the CSOP legislation and would instead be treated as a non tax-advantaged share option. This is because for CSOP purposes, the option price must not be manifestly less than the market value of shares of the same class at the time the option is granted. See the Why use non tax-advantaged share options? guidance note for details of the tax treatment of such share options.

Vesting of option

There can never be an income tax or NIC charge arising when a CSOP option vests, ie becomes available for exercise.

Exercise of option

Neither income tax nor NIC arises on exercising a CSOP option in accordance with the scheme, provided

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