Company Share Option Plans (CSOP)

HMRC-approved share option schemes for growing and established UK companies

Company Share Option Plans (CSOPs) are HMRC-approved, tax-advantaged share option schemes that allow companies to grant selected employees and full-time working directors options over shares with favourable tax treatment. After significant reforms that took effect on 6 April 2023, CSOPs have become much more accessible and flexible, particularly for companies that cannot use EMI or that want to grant higher-value awards to key people.

These reforms doubled the individual CSOP limit to £60,000 (based on market value at grant) and removed the previous “worth having” restriction on share classes. This means many more companies, including those with multiple share classes or private equity investment, can now use CSOPs effectively.

At Jonathan Lea Network, we design, draft, implement and maintain CSOP schemes for startups, scale-ups, mid-market companies and established groups across England and Wales. Our corporate, tax and employment specialists work together so your plan is fully compliant, commercially aligned, investor-friendly and clearly understood by participants.

We advise clients nationwide from our bases in Sussex and London.

Call us on 01444 708 640 or complete our online enquiry form to arrange a free introductory call with a CSOP solicitor.

What is a Company Share Option Plan (CSOP)?

A tax-advantaged share option scheme approved by HMRC.

A CSOP is a statutory share option plan under which qualifying employees and full-time working directors are granted options over shares with special tax advantages. In outline, if the statutory conditions are met:

• No income tax or National Insurance contributions (NICs) are payable when the option is granted.
  
• No income tax or NICs are payable when the option is exercised, provided it is exercised at least three years after grant, or earlier in certain permitted circumstances such as a takeover, redundancy, injury or disability, retirement or death.
  
• Any gain is instead charged to capital gains tax (CGT) when the shares are sold, calculated on the difference between the sale price and the exercise price.
  

Eligibility in broad terms.

• Participants must be employees or full-time working directors (consultants and non-executive directors do not qualify).
  
• The total value of CSOP options a person holds (measured at market value at the date of grant) cannot exceed £60,000.
  
• The scheme must meet HMRC’s statutory requirements and be properly registered and notified.
  

CSOPs are especially useful for companies that cannot use EMI, or that wish to offer a clean, HMRC-approved scheme to senior staff and directors.

How do CSOPs work?

Granting CSOP options.

Under a CSOP, the company grants options to selected employees or full-time working directors. Each option gives the holder the right to acquire a specified number of shares at a fixed exercise price in the future. The exercise price is usually at least equal to the market value of the shares at the date of grant.

Statutory eligibility rules.

To achieve CSOP tax advantages, certain conditions must be satisfied, including:

• The company (or group) must meet HMRC’s requirements on independence and control, unless a group-wide scheme is being used where different rules apply.
  
• The participant must be an employee or full-time working director of the company (or a qualifying group company).
  
• The total market value of shares under CSOP options held by an individual at the date of grant cannot exceed £60,000.
  
• The shares under option must form part of the company’s ordinary share capital. From 6 April 2023, the previous “worth having” restriction has been removed, significantly increasing flexibility for companies with multiple share classes.
  

Vesting and performance conditions.

CSOP legislation does not prescribe vesting or performance rules, so you can tailor these to your needs. For example, you can use:

• Time-based vesting (for example over three to five years).
  
• Performance vesting tied to revenue, profit, project milestones or strategic KPIs.
  
• Exit-only vesting so that options only become exercisable on a sale or listing.
  
• Leaver provisions, malus and clawback terms, provided they do not conflict with the statutory requirements.
  

Exercise and tax treatment.

If the statutory CSOP rules are complied with:

• No tax or NICs arise at grant.
  
• No income tax or NICs arise on exercise if the option is exercised at least three years after grant, or earlier in certain permitted “good leaver” or corporate events such as takeover, redundancy, retirement, injury, disability or death.
  
• CGT is generally due when the shares are sold, with the gain calculated as sale proceeds minus the exercise price (and any allowable costs).
  

If options are exercised outside these rules, or if the scheme or grants are not properly registered or notified, the options may lose CSOP status and be treated as unapproved, leading to income tax (and possibly NICs) on exercise.

Why choose a CSOP instead of other schemes?

Tax advantages for participants.

Because qualifying CSOP options can convert what would otherwise be income-taxed gains into CGT, they are highly attractive to employees and directors, especially where share values are expected to rise materially over time.

A clean, HMRC-recognised structure.

CSOPs are familiar to investors, acquirers and auditors. A properly implemented CSOP is generally easier to explain and diligence than a purely bespoke unapproved plan or complex share structure, which can be reassuring in funding and exit processes.

A strong alternative where EMI is not available.

CSOPs are often used when:

• The company is too large for EMI.
  
• The trade is not EMI-qualifying.
  
• The company’s ownership structure prevents EMI eligibility.
  
• Awards above EMI limits are required for certain individuals.
  

Post-2023 flexibility.

Since 6 April 2023, CSOPs have become more flexible because:

• The per-individual limit has doubled to £60,000.
  
• The old “worth having” restriction has been removed, so CSOPs can now use any class of ordinary share capital. This allows companies with multiple share classes, including private equity-backed and institutional investor-backed structures, to use CSOPs more effectively.
  

Works well alongside other schemes.

CSOPs can run in parallel with EMI, unapproved options, growth shares, LTIPs and other incentives. Many companies use CSOP for a core group of qualifying staff and layer unapproved or other arrangements for those who fall outside the statutory rules.

When is a CSOP the right choice?

Typical situations where CSOPs are effective.

• Your company cannot use EMI due to size, trade or ownership, but you still want a tax-efficient, HMRC-approved option scheme.
  
• You have a growing management or senior team that you want to lock in with medium to long-term equity incentives.
  
• You have multiple share classes and investors, and you want a scheme that works with, not against, your existing capital structure.
  
• You want an option scheme that will stand up well in investor or buyer due diligence, without excessive complexity or bespoke drafting.
  
• You are planning for a future exit and want to align key employees and directors with the long-term growth and value of the business.
  

We will help you compare CSOP with EMI, unapproved options and other equity structures to select the best mix for your circumstances.

Step 1: Assessing eligibility, structure and valuation

Understanding your corporate and investor framework.

We first review your current position, including:

• Group company structure and corporate relationships.
  
• Articles of association, shareholders’ agreement and any investment terms.
  
• Existing incentive arrangements (EMI, unapproved options, growth shares, phantom shares and so on).
  

This allows us to confirm that CSOP is available to you and that it can be integrated without causing unwanted knock-on effects.

Choosing the right share class for CSOP.

We review your share classes and help you decide which class should be used for CSOP options. From 6 April 2023 there is no “worth having” test; the only structural requirement is that the shares are part of the company’s ordinary share capital. This gives you far more flexibility to select a class that balances employee incentives with investor protections and future fundraising plans.

Setting an HMRC-defensible market value.

We help you determine an appropriate market value for your shares at the date of grant, typically working alongside your accountants or valuation specialists. Obtaining HMRC agreement to the valuation is not mandatory, but in practice an agreed valuation provides certainty on the exercise price and reduces the risk of HMRC challenging the valuation later and seeking additional income tax or NICs.

Step 2: Designing your CSOP

Deciding who participates and how much they receive.

We help you identify which employees and full-time working directors will participate, and at what levels, bearing in mind:

• The individual CSOP limit of £60,000 (by market value at grant).
  
• The need to balance incentives across your team.
  
• Potential use of unapproved options or other incentives alongside CSOP for those who need higher allocations.
  

Vesting, performance and exit conditions.

We design vesting and performance rules that match your strategy. This can include:

• Time-based vesting to encourage long-term retention.
  
• Performance conditions aligned with financial metrics, operational milestones or strategic objectives.
  
• Exit-only arrangements so that options vest and become exercisable only in connection with a sale or listing.
  

Leaver, malus and clawback provisions.

We draft good and bad leaver provisions, set out what happens to options on leaving, and, where appropriate, include malus and clawback mechanisms. These must be structured carefully so they are enforceable and consistent with CSOP legislation.

Step 3: Drafting CSOP rules, option agreements and HMRC notifications

Plain-English scheme rules and grants.
We draft:

• CSOP scheme rules that comply with statutory requirements and set out how the plan operates.
  
• Individual option agreements (or grant letters) that specify each participant’s award, exercise price, vesting and any specific conditions.
  

All documentation is written in accessible language while maintaining technical accuracy, so your board, investors and participants understand how the scheme works.

Corporate approvals and constitutional changes.
We prepare:

• Board minutes approving the scheme, the option pool and individual grants.
  
• Shareholder resolutions where required, for example to increase share capital or amend articles.
  

Registering and notifying your CSOP with HMRC.

CSOPs must be registered with HMRC via the Employment Related Securities (ERS) online system. Each qualifying option grant must be notified to HMRC within 92 days of the date of grant to secure CSOP tax advantages. If you miss this deadline, that option will lose CSOP status and will be treated as an unapproved option. We handle scheme registration and notifications as part of our service so you remain compliant.

Step 4: Implementation, administration and ongoing support

Communicating the scheme to participants.

We help you explain the CSOP to your employees and directors, including:

• How options vest and when they can be exercised.
  
• The basic tax treatment (no tax on grant, potential tax advantages on exercise and sale).
  
• The impact of leaving, performance and corporate events.
  

Clear communication increases engagement and the perceived value of the scheme.

Record-keeping and ERS annual returns.
We support you with:

• Keeping accurate records of grants, exercises, lapses and leaver events.
  
• Filing annual ERS returns for the CSOP with HMRC, which is mandatory even if there have been no new grants in a given year.
  

Maintaining compliance through corporate events.

Corporate actions such as share splits, consolidations, buy-backs, new funding rounds or group reorganisations can affect CSOP options. We help you manage adjustments and ensure the scheme remains compliant and fair to participants.

Supporting funding rounds and exits.

Investors and buyers will examine your CSOP closely. We ensure your documentation and records are in good order and help you explain how options will be treated in a transaction, reducing friction and delays in deals.

Who we help with CSOP schemes

Fast-growing companies that cannot use EMI.
We work with companies that have outgrown EMI thresholds, operate in non-qualifying trades or have ownership structures that prevent EMI, but still want a tax-advantaged, HMRC-approved scheme to attract and retain talent.

Scale-ups and mid-market businesses preparing for institutional investment.
CSOPs are often a key part of the incentive package for management teams when private equity or other institutional investors come on board. We design CSOPs that complement investor structures and expectations.

Established companies aligning senior staff with long-term value.
We help more mature businesses introduce or refresh CSOPs to maintain alignment between senior employees and the company’s performance and growth plans.

Companies with multiple share classes and complex cap tables.
Now that CSOPs can use any class of ordinary share capital, they are much more accessible to private equity-backed and multi-class share structures. We ensure the class chosen for CSOP options works well with your wider capital structure.

Employers running hybrid incentive arrangements.
We advise employers who operate CSOPs alongside EMI, unapproved options, phantom shares, LTIPs or growth shares, making sure all pieces fit together coherently.

Common challenges and how we solve them

“We need to choose the right share class for our CSOP.”
Since April 2023, CSOPs can use any class of ordinary share capital. We help you select or structure a class that offers clear incentives to employees while respecting investor rights and future fundraising flexibility.

“We are not sure whether our directors and employees qualify.”
We confirm which individuals meet the employee or full-time working director requirements, and we suggest alternative arrangements (such as unapproved options) for those who do not.

“We want to grant more than £60,000 per person.”
We design parallel unapproved schemes, growth shares or other arrangements to sit alongside your CSOP, so higher allocations can be made while keeping the CSOP within statutory limits.

“We are worried about missing HMRC deadlines or making errors.”
We build in processes to ensure grants are notified within 92 days and that annual ERS filings are completed correctly and on time, reducing the risk of losing tax relief or incurring penalties.

“We are planning a funding round or exit—will this disrupt our CSOP?”
We review your CSOP in light of proposed transactions, advise on any necessary adjustments and ensure option treatment in deal documents is clear, fair and compliant.

Why choose Jonathan Lea Network for CSOP advice?

Integrated corporate, tax and employment expertise.
We bring together lawyers with experience across corporate law, tax and employment, so your CSOP is considered from all key angles and is less likely to run into unexpected issues later.

Plain-English, participant-friendly drafting.
We pride ourselves on producing scheme rules and option agreements that are accessible and easy to explain, improving engagement and trust among participants.

Investor-ready, due diligence-tested structures.
We are used to acting on transactions where CSOPs are scrutinised by investors and acquirers. We design your scheme with that scrutiny in mind from day one.

Transparent, value-focused fees.
We offer fixed-fee or staged-fee options for CSOP design and implementation where possible, with clear estimates for more complex projects, giving you budget certainty.

Ongoing support as your business evolves.
We remain on hand to help with future grants, adjustments, corporate events, funding rounds and exits, so your CSOP continues to serve its purpose as the company grows.

What to do now

If you are considering a Company Share Option Plan—or you already have a CSOP and want to ensure it reflects the post-2023 rules and best practice—early, specialist advice will help you avoid costly mistakes and maximise the scheme’s impact.

All enquiries are confidential. Once we are instructed, our advice is generally protected by legal professional privilege.

Contact us:

• Email: wewillhelp@jonathanlea.net
• Phone: 01444 708640
• Make an enquiry online

Unlock your company’s potential. Reward future success. Protect your business.

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