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HMRC internal manual

National Insurance Manual

Class 1 NICs: Employment - Related Securities: Shares - Company Share Option Plans

Paragraph 7A of Part 9 to Schedule 3 of the Social Security (Contributions) Regulations 2001

Company Share Option Plans (CSOPs) are discretionary and allow a company to select the employees and directors it wishes to reward. The company grants eligible employees or directors an option to purchase company shares in the future at a price set on the date of grant. There are income tax and NIC advantages on the gains arising from the acquisition of shares awarded through an approved CSOP. The value of the option on the date of grant must not exceed £30,000.

Any shares acquired by an employee through an approved CSOP are excluded from the meaning of asset by virtue of section 701 of the Income Tax (Earnings and Pensions) Act 2003 and therefore cannot fall within the meaning of readily convertible asset as defined in section 702 of ITEPA 2003 (see NIM06835) unless the option is exercised outside of the plan rules.

Under an approved CSOP, the option may be exercised at any time allowed under the rules of the plan and must be exercised in accordance with a plan that is still approved. There must be a minimum of three years and maximum of ten years between the grant and exercise of an option to obtain the full income tax and NIC relief.

If the option is exercised before three years have elapsed from the date of grant or before three years have passed since the previous tax relieved exercise, a Class 1 NICs liability arises provided that the shares are readily convertible assets. The amount of earnings is the difference between the acquisition cost and market value of the shares acquired on the date of exercise. An income tax charge also arises on the same amount.

The exception to this is where the participant is a good leaver. A good leaver is an individual who ceases to be a full-time employee or director of the plan organiser because of:

  • injury; or
  • disability; or
  • redundancy; or
  • retirement, meaning the retirement age specified in the plan rules; and

exercises the option within six months of the day in which he ceases to be such an employee or director.

See ERSM301000 for further information about CSOPs.