What Is a Company Share Option Plan (CSOP) in the UK?

A Company Share Option Plan (CSOP) is a tax-advantaged discretionary share option scheme in the UK. 

It lets companies offer selected employees or full-time directors the option to buy shares at a fixed price, usually set at the fair market value on the day the options are granted.

These options typically come with a vesting period, meaning employees can only exercise them after a certain amount of time or once specific performance milestones are reached.

What makes CSOPs particularly appealing is their favorable tax treatment. If employees hold the options for at least three years and exercise them within ten years of the grant date, they pay no Income Tax or National Insurance on the gain at exercise. They are only subject to Capital Gains Tax (CGT) when they eventually sell the shares.

In many ways, CSOPs are similar to Incentive Stock Options (ISOs) in the US, as both offer favourable tax treatment, provided holding requirements are met. 

Note: In the UK, there are four main types of employee share schemes: CSOPs, Enterprise Management Incentives (EMIs), Save As You Earn (SAYE), and Share Incentive Plans (SIPs).

Which companies can have a Company Share Option Plan (CSOP)?

CSOPs are highly flexible and are not limited by company size, sector, or asset value. This makes them accessible to a much broader range of businesses compared to other schemes like Enterprise Management Incentives (EMIs).

Any UK-incorporated company can set up a Company Share Option Plan (CSOP), provided it meets certain conditions:

• Private companies are eligible as long as they are not controlled by another unlisted company.
• Public companies listed on recognized stock exchanges, such as the London Stock Exchange (LSE) or New York Stock Exchange (NYSE), can also offer CSOPs.
• Foreign companies can offer CSOPs to UK employees through their UK subsidiaries, provided the foreign parent is listed on a recognized exchange.

The only exclusion is for private companies that are subsidiaries of unlisted parent companies.

Who can CSOPs be granted?

1. Employees

Any employee of the company can be granted CSOP options. Unlike EMI schemes, there is no minimum working hours requirement.

2. Full-time directors

Full-time directors are also eligible to receive CSOPs, as long as they are actively engaged in the business (typically working 25+ hours per week).

3. UK-based or non-UK employees

While CSOPs are a UK-specific scheme, companies may be able to offer them to certain non-UK employees under limited circumstances, particularly if the employee is on the payroll of a UK entity. However, tax treatment may differ.

Exclusions:

• An individual who holds (or is entitled to acquire) more than 30% of the company’s shares either directly or indirectly at the time of grant is not eligible for CSOPs.
• External advisors, consultants, and board members do not qualify for CSOPs.

How does a Company Share Option Plan (CSOP) work? 

1. Designing the CSOP scheme

The company begins by designing the plan, which includes:

• Who will receive options
• How many options will be granted
• The exercise price (usually set at fair market value)
• Vesting conditions (e.g. time-based or performance-based)
• Any performance criteria or leaver clauses

The scheme must comply with Schedule 4 of the Income Tax (Earnings and Pensions) Act 2003.

2. Agreeing on the share valuation (if unlisted)

For private companies, the company must agree on a market value with HMRC before granting options. This involves:

• Submitting financial accounts and supporting documents
• Receiving confirmation of the Unrestricted Market Value (UMV) and actual market value (AMV)

The UMV is used to check whether the value of options per employee stays within the £60,000 cap.

3. Granting options to employees

Once the valuation is agreed, the company grants options to selected employees and full-time directors. These grants:

• Are discretionary (the company chooses who receives them)
• Must not exceed £60,000 worth of options per individual (at the UMV)
• Do not trigger any tax at the point of grant

Options are usually subject to a vesting schedule, such as four years with a one-year cliff.

4. Holding period and vesting

To qualify for tax benefits, the employee must:

• Hold the option for at least 3 years before exercising
• Exercise within 10 years of the grant date

Once vested and the minimum holding period is met, employees can exercise their options,i.e., buy shares at the original exercise price.

If exercised under qualifying conditions:

• No income tax or national insurance is due at this point
• The shares now belong to the employee

6. Selling the shares

When the employee eventually sells their shares, the difference between the sale price and the exercise price is subject to capital gains tax (CGT).

Company Share Option Plan (CSOP) taxation

At grant: No income tax or National Insurance Contributions (NICs) are due when the options are granted.

At exercise: If the options are held for at least 3 years and exercised within 10 years from grant date, no income tax or NICs apply. 

At sale: When the employee sells the shares, capital gains tax (CGT) is due on the profit made (i.e., sale price minus exercise price).

If options are exercised before the 3-year minimum, tax benefits may still apply in specific leaver situations such as redundancy, retirement, injury, or death.

Otherwise, early exercise may trigger income tax and NICs.

Company Share Option Plan (CSOP) Vs Enterprise Management Incentive (EMI)

While both the CSOP and EMI share schemes offer generous tax benefits, they are built for different kinds of companies and use cases.

1. Company eligibility

EMI is only available to independent UK companies with fewer than 250 full-time employees and gross assets under £30 million. Additionally, EMI excludes certain sectors such as financial services and property development.

CSOP, on the other hand, imposes no limits on company size, headcount, or sector. This makes it an ideal fallback once a business outgrows EMI or operates in a restricted industry. 

2. Employee eligibility and value limits

Under EMI, employees must work at least 25 hours per week, or spend 75% of their working time with the company to qualify. There is also a per-person limit of £250,000 in EMI options, calculated at the time of grant.

CSOPs have no working time requirement, and options can be granted to any employee or full-time director, as long as they do not own more than 30% of the company. The value limit for CSOPs is lower (£60,000 per individual), but that limit is often enough for senior hires.

3. Tax outcomes

Both schemes are designed to defer taxation until sale of shares, rather than on grant or exercise, assuming conditions are met.

For EMI:

• No income tax or national insurance contributions (NICs) are due on grant of EMI options.
• No income tax or NICs are due on exercise, provided the options were granted at market value.
• On sale, gains are subject to capital gains tax (CGT).

If the shares are held for at least 24 months from the date of grant, the individual may qualify for Business Asset Disposal Relief (BADR), which reduces the CGT rate. BADR applies to the first £1 million of qualifying lifetime gains.

If the shares are sold before the 24-month holding period is met, or if the BADR limit has already been used, CGT is charged at the standard rates.

For CSOP:

• No income tax or NICs if held for at least three years and exercised within ten years of grant.
• On sale, CGT applies. 

What is CSOP certification?

CSOP certification refers to the process by which a company confirms that its Company Share Option Plan (CSOP) meets the qualifying conditions set out in Schedule 4 of the Income Tax (Earnings and Pensions) Act 2003.

Unlike older approved share schemes that required formal approval from HMRC, CSOPs now operate on a self-certification basis. This means the company must ensure the plan is compliant and then register it with HMRC through the Employment Related Securities (ERS) service by 6 July following the end of the tax year in which options are first granted.

While advance approval is not required, HMRC can later review whether the plan was correctly structured. If it’s not compliant, tax advantages may be lost. Therefore, it's essential to obtain legal and tax advice when drafting your CSOP documentation.

Frequently asked questions

1.  What is the difference between CSOP and ESOP?

A CSOP (Company Share Option Plan) is a UK-specific discretionary share option scheme that allows selected employees or directors to purchase company shares at a fixed price, usually after a vesting period, with tax advantages if certain conditions are met.

An ESOP (Employee Stock Ownership Plan) is more commonly used in the US and internationally. Like CSOPs, ESOPs also allow employees to acquire company shares, but they may or may not offer tax advantages, depending on how the plan is structured.

2. What is CSOP valuation?

CSOP valuation is the process of determining the fair market value (FMV) of the company’s shares at the time options are granted under a CSOP.

For unlisted companies, this value must be agreed in advance with HMRC’s Shares and Assets Valuation (SAV) team. The valuation ensures that:

• Options are granted at or above market value (a CSOP requirement)
• Each employee’s total grant stays within the £60,000 limit, based on the Unrestricted Market Value (UMV)