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Making shares a tax-efficient reward for employees

There are various types of employee share scheme which offer tax advantages. Among these, company share ownership plans (CSOP) are sometimes overlooked. What advantages do they have over some of the other schemes?

Why use a share scheme?

Different employers have various reasons for wanting to give shares to employees as incentives. Two popular ones are that it encourages workers’ commitment to the business and that it is more tax efficient than a simple increase in salary. Company share ownership plans (CSOPs) are one of the HMRC-approved schemes.

Why CSOPs?

There are share schemes which allow you to offer a greater value of shares to your employees than CSOPs, e.g. enterprise management schemes, but they carry more restrictions on when they can be used, such as the size of your company and the nature of its trade.

Which employees?

Another advantage of CSOPs over some types of scheme is that you can include all your full or part-time employees, including directors, as long as they don’t own more than 25% of the company’s shares.

Tip. There are no restrictions on which employees are entitled to join your scheme.

How does it work?

There are two key dates for CSOPs; the date of grant, i.e. when you grant an employee the right (option) to acquire shares; and the exercise date, i.e. when an employee takes up (exercises) their entitlement. When the employee exercises their option they are allowed to buy the shares at the value of the date of grant. So as long as the company has grown in value the employee gains. If the value hasn’t increased, the employee doesn’t have to exercise their option.

Tax and NI incentive

The tax advantage of a CSOP is that no income tax or NI is payable at the time you grant an option, nor when the employee exercises it. This is providing, as a general rule, that it’s exercised between the third and tenth anniversaries of the date it was granted. Your company receives a corporation tax deduction equal to the increase in share value between the date of grant and exercise.

Maximum value

To qualify for the tax incentive employees can’t hold CSOP options with a value, at the time of grant, totalling more than £30,000.

Tip. CSOP rules allow you to set conditions to determine if and when employees can exercise options. You can, therefore, set performance targets to help get the most out of your employees. You’ll need to discuss the conditions you want to impose with whoever sets up the scheme for you.

How’s it done?

HMRC provides model documents for employers who want to use a CSOP (see The next step ). However, it’s probably one of those jobs to get your accountant involved in.

While CSOPs allow similar tax advantages to other share schemes, there are no restrictions on the types of business that can use them. Full and part-time employees (including directors) can be included and you can set conditions, such as targets, to encourage your employees’ performance.

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