Recent developments affecting Employee Share Schemes
October 12, 2022
The Growth Plan 2022 announced by the Chancellor of the Exchequer includes some changes to the employee share schemes, a summary of which is set out below.
Company Share Option Plan (CSOP)
Perhaps the most significant change announced in the Growth Plan 2022 affects CSOPs. In particular, the individual limit is being increased from £30,000 to £60,000 and the share class requirement rules are being relaxed. These changes will take effect for options granted from 6 April 2023.
CSOP is a tax-advantaged discretionary share option plan by which an independent company (including a company controlled by an employee ownership trust), irrespective of size or type of business can provide equity incentives to their employees. In normal circumstances, no income tax or NIC liability arises if the CSOP options are exercised after a period of three years from the date of grant. Such tax advantages also apply if CSOP options are exercised earlier, in certain special circumstances.
Currently, an employee can hold CSOP options over a maximum of £30,000 worth of shares. Moreover, CSOP options can be granted over a class of shares that consists of the majority of the issued shares which are either (i) ‘open market shares’ i.e. held by non-employees, or (ii) ‘employee-control shares i.e. held by employees.
The Growth Plan 2022 (further announced in the Employment Related Securities Bulletin 45 published on 23 September 2022) increases the individual limit of CSOP options from £30,000 to £60,000 and will remove the share class requirement.
Income Tax rate *updated 17th October 2022
The current basic rate of income tax is 20%. The government had in the previous budget announced that the basic rate would be cut by 1% from April 2024. The Growth Plan has announced that the 19% basic rate tax will take effect a year earlier, from April 2023. *Please note that the Chancellor announced on the 17th October 2022 that the current basic rate of income tax will continue to be 20% indefinitely.
National Insurance Contributions (NICs)
The increase of the NICs contributions by 1.25% which came into effect from April 2023 will revert back to pre-April 2023 rates from 6 November 2022 NICs. Accordingly, the Health and Social Care Levy will not come into effect from 6 April 2023. The thresholds that were increased earlier in the year will be maintained.
The government has made some welcome changes to the CSOP rules. These changes should not only be beneficial for employees in the listed and AIM companies arena but also to those in the private company sector. By increasing the individual limit, employees would be able to enjoy the tax advantages associated with CSOP option over a larger number of shares which in turn would aid in the retention and motivation of staff. The relaxation of the share class rules would enable private companies who do not qualify for the grant of EMI options or who have exceeded the £3 million EMI limit to provide incentives to employees over the economic growth of the company while the existing shareholders maintain the control. However, these changes will still not benefit employees of companies with a majority VC or private equity backing.