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HMRC internal manual

Employment Income Manual

HM Revenue & Customs
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PAYE: employment-related securities: approved company share option plan (CSOP) schemes

Company Share Option Plan

An employer may apply to the Revenue for an employee share scheme to be approved under specific legislation. The Employee Share Schemes Unit of Revenue Policy, Capital and Savings deals with applications for the approval of schemes (see SSM2.3). Approved Company Share Option Plans (CSOP) are the most popular type of approved share scheme (see SSM2.10). The relevant legislation is in Part 7 Chapter 8 and Schedule 4 ITEPA 2003.

Employees and directors who receive shares or share options under approved schemes can get relief from the charge to income tax as employment income and NICs that would normally arise. Under an approved CSOP scheme, an employee may exercise the option at any time allowed under the rules of the scheme. However, in order to obtain the tax and NICs benefits, there are some further constraints (see SSM2.13). Broadly, the option must be exercised in accordance with a scheme that is still approved and there must be a minimum period of 3 years between the grant of the option to an employee and the exercise of the option by that employee.

PAYE on early exercise

With effect from 9 April 2003, if an approved CSOP option is exercised before the expiry of the 3 year period from the date of grant, subject to one exception, the person who was the employer at the time of grant must operate PAYE in respect of the amount chargeable to tax as employment income on the event of exercise if the shares are readily convertible assets (see EIM12400).

The exception is if the individual exercising the option has ceased to be a full-time director or qualifying employee because of injury, disability, redundancy or retirement and exercises the option within 6 months of the day on which the person ceases to be such a director or employee.

Where an amount is chargeable to tax as employment income on the event of an exercise of an approved CSOP option occurring before 9 April 2003, there is no requirement for the employer to operate PAYE.