Company Share Option Plan (CSOP) UK 2026: Tax Benefits, Rules and Worked Examples

What is a Company Share Option Plan?

A Company Share Option Plan (CSOP) is an HMRC-approved discretionary share option scheme that allows companies to grant selected employees options to buy shares at today's price, with favourable tax treatment on exercise if a three-year minimum period is met.

"Discretionary" means the company chooses which employees receive options and how many -- unlike the Share Incentive Plan (SIP), which must be offered to all eligible employees on the same terms.

CSOPs were made significantly more attractive from 6 April 2023 when the individual limit doubled from £30,000 to £60,000 and certain company restrictions were relaxed. They are now a mainstream tool for companies that are too large or in a non-qualifying trade for EMI options.

How the tax treatment works

At grant

No income tax or NI arises when options are granted. The employee simply holds a contractual right to buy shares at a fixed price in the future.

At exercise -- the key benefit

If the employee exercises their options at least three years after the grant date, the entire exercise gain is free of income tax and National Insurance contributions (both employee and employer).

The exercise gain = (market value of shares at exercise date) minus (exercise price paid by the employee).

In many option schemes, this gain would be taxed as employment income at up to 47% (45% income tax + 2% NI for higher earners). Under CSOP, it is zero.

At sale

When the employee eventually sells the shares, Capital Gains Tax applies on any further growth:

• Base cost for CGT: the market value of the shares at the date of exercise (not the original exercise price -- the exercise gain is already income-tax-free, so the base cost steps up to market value at exercise).
• CGT rate: 18% (basic rate taxpayer) or 24% (higher/additional rate taxpayer) on gains above the Annual Exempt Amount of £3,000.

If shares are sold immediately on exercise (a "same-day sale"), the CGT gain will be zero because the sale price equals the exercise-day market value. In that case the employee simply retains the exercise gain tax-free.

The £60,000 limit

The £60,000 cap is measured as the market value of shares under option at the date of grant. It applies per employee across all CSOPs at the same company (or group).

An employee who already has £40,000 of options granted in a previous year can receive a further £20,000 worth of new options in the current year (assuming the first options have not yet lapsed).

Exercise price must equal market value

A fundamental requirement of CSOP is that the exercise price must not be less than the market value of the shares on the grant date. Options cannot be granted at a discount.

For unquoted companies, market value must be agreed in advance with HMRC's Shares and Assets Valuation (SAV) team, or determined using a documented valuation methodology. For listed companies, market value is the Stock Exchange closing mid-price on the grant date.

This requirement is in contrast to EMI, where options can also be granted at market value -- but where phantom discount schemes (issuing new shares at par value) are sometimes used. CSOP prohibits any discount.

Self-certification via the ERS system

Before April 2014, CSOPs required formal HMRC approval, which could take months. Since then, companies simply:

1. Set up the scheme rules.
2. Grant options.
3. Register the scheme with HMRC via the Employment Related Securities (ERS) online service.
4. Submit an annual return by 6 July following the tax year in which options were granted.
5. Self-certify that the scheme meets the CSOP statutory requirements.

There is no upfront cost and no waiting for approval. However, self-certification puts the responsibility on the company -- if the rules do not comply with the legislation, the options will not qualify for the favourable tax treatment.

Qualifying company requirements

Unlike EMI, there are no company size restrictions for CSOP. The company must be:

• A trading company, or the holding company of a trading group.
• The shares under option must be of a class listed on a recognised stock exchange, or fully paid-up ordinary shares that are not redeemable.
• The company must not be under the control of another company (unless that other company is itself listed on a recognised exchange -- so CSOP can be used by subsidiaries of listed groups).

The wide availability of CSOP to large companies is the main reason it remains in use despite EMI's more favourable BADR treatment.

Worked example

A software engineer at a listed company receives options over 10,000 shares at an exercise price of 50p (equal to market value at grant). Three years later, the share price has risen to £2.00.

At exercise:

• Exercise gain = (£2.00 - £0.50) x 10,000 = £15,000.
• Income tax: £0.
• NI: £0.
• The engineer pays £5,000 to exercise (10,000 x 50p) and receives shares worth £20,000 -- a net gain of £15,000 tax-free.

If the engineer sells immediately after exercise:

• Sale proceeds = £20,000.
• CGT base cost = £20,000 (market value at exercise).
• CGT gain = £0.
• Total tax = £0. The entire £15,000 gain is received free of tax.

If the engineer holds the shares and sells two years later at £2.50:

• Sale proceeds = £25,000.
• CGT base cost = £20,000.
• CGT gain = £5,000.
• After Annual Exempt Amount (£3,000): £2,000 taxable.
• CGT at 24% (higher-rate taxpayer): £480.

The total tax on a £20,000 gain (from 50p to £2.50) is just £480.

CSOP vs EMI: when to use which

Both are HMRC-approved option schemes with no income tax/NI on exercise, but they differ in important ways:

EMI is better when:

• The company qualifies (under £30m gross assets, under 250 employees, qualifying trade).
• Long-term employees want the BADR advantage on a large gain.
• Higher individual option limits are needed.

CSOP is the answer when:

• The company is too large, too asset-heavy, or in a non-qualifying trade for EMI.
• The company is listed (EMI is rarely used by listed companies).
• The company wants to grant modest options to a broad group of senior employees.

When to use CSOP in practice

Common real-world scenarios:

• Scale-up company that has grown beyond EMI eligibility: gross assets now exceed £30m -- switch new grants to CSOP.
• Listed company employee schemes: large listed companies regularly use CSOPs for discretionary long-term incentive plans (LTIPs) alongside deferred bonus plans.
• Financial services or property companies: these trades are excluded from EMI but qualify for CSOP.
• VC-backed growth company at Series B/C: may have grown beyond EMI thresholds; CSOP plugs the gap.

Annual return and compliance

The key compliance obligation is the annual ERS return to HMRC, due by 6 July each year. It must report:

• All options granted during the tax year.
• All options exercised during the tax year.
• Any options that lapsed or were cancelled.

Failure to file on time triggers automatic late filing penalties starting at £100, rising to £5,000 for returns more than 12 months late.

Sources

• HMRC: Company Share Option Plans
• HMRC: Employment Related Securities: guidance notes
• gov.uk: Capital Gains Tax rates
• HMRC: Shares and Assets Valuation