Company Share Option Plans (CSOP)

A Company Share Option Plan (CSOP) is a tax-advantaged share scheme that lets you reward key employees by giving them the right to buy shares in your company at a fixed price. When set up correctly, employees pay no Income Tax or National Insurance on the increase in share value between grant and exercise, making it an attractive way to retain talent and align employee interests with business growth.

What is a CSOP?

A CSOP gives your employees the option to purchase shares in your company at a price fixed when you grant the option. The employee isn't obligated to buy — they can choose to exercise the option later if the shares have increased in value, potentially making a profit.

The key advantage is tax efficiency. If your plan meets HMRC's requirements, your employees won't pay Income Tax or National Insurance contributions on any gain they make when they exercise their options (buy the shares). They'll only face Capital Gains Tax when they eventually sell the shares, and even then, they may be eligible for reliefs that reduce the bill.

Who can participate?

CSOPs are designed for key employees. You decide which employees can participate in your plan, allowing you to target the scheme at staff you want to retain and incentivise.

Directors can participate, but there are restrictions to ensure the scheme remains focused on genuine employment relationships rather than tax avoidance.

Setting up a CSOP

To establish a CSOP, you must:

• Create formal plan documentation setting out the rules
• Decide which employees are eligible
• Determine the option price (usually the market value of shares when granted)
• Set performance conditions if you wish (though these are optional)

You don't need to register the plan with HMRC in advance, but you must report it through your annual employment-related securities returns.

Tax advantages for employees

At grant: No tax charge when you grant the option to the employee.

At exercise: Provided the plan meets HMRC's conditions, there's no Income Tax or National Insurance to pay when the employee exercises their option and acquires the shares. This applies even if the shares are now worth considerably more than the option price.

At sale: When the employee eventually sells their shares, they'll pay Capital Gains Tax on any gain. They can use their annual Capital Gains Tax exemption (Annual Exempt Amount) to reduce or eliminate the tax due on smaller gains.

Tax position for your company

Your company can claim Corporation Tax relief on the difference between the market value of shares when employees exercise their options and the price the employees actually pay. This relief is available in the accounting period when employees exercise their options.

You cannot claim relief if you grant options at a discount below market value at the time of grant.

Option limits

There are limits on the value of shares employees can hold under a CSOP:

• Each employee can hold options worth up to £60,000 (based on the market value of shares at the time you grant the option)
• This is a cumulative limit across all unexercised CSOP options held by that employee in your company

Exercise period

Employees must usually wait at least three years from the grant date before exercising their options to benefit from the tax advantages. However, options can be exercised earlier if certain qualifying conditions are met, such as the employee's death, injury, disability, redundancy, or retirement.

Options must be exercised within ten years of the grant date.

Reporting obligations

You must report your CSOP activity to HMRC annually through the employment-related securities (ERS) online service. This applies even if you've had no activity during the year (in which case you submit a nil return).

Annual return deadline: 6 July following the end of the tax year. For the 2025/26 tax year, your return is due by 6 July 2026.

What to report: You must report all option grants, exercises, releases (when options lapse without being exercised), and any other reportable events during the tax year.

How to report: You must submit your return online using either:

• HMRC's end of year return template for CSOPs
• Your own template based on HMRC's technical notes

Make sure you use the correct template for the tax year you're reporting. Using an outdated template will cause processing delays.

Before submitting, you can check your file for formatting errors using HMRC's spreadsheet checking service. This helps avoid delays and rejections.

Keeping records

Maintain detailed records of:

• When you granted each option
• The option price and market value at grant
• Which employees hold options
• When employees exercise or forfeit their options
• Any variations to the plan

These records support your annual returns and help you calculate any Corporation Tax relief due to your company.

Getting it right

CSOPs offer valuable tax benefits, but only if your plan meets all HMRC's conditions. The rules around valuation, employee eligibility, and timing are detailed. Getting the share valuation wrong at grant, for example, can result in unexpected tax charges for employees.

Before establishing a CSOP, ensure your plan documentation is properly drafted and consider obtaining an HMRC-approved valuation of your shares to avoid disputes later.

Sources

• Company Share Option Plan (CSOP): end of year return template, technical notes and guidance notes

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.