Budget: Time to revisit Company Share Option Plans

CSOPs in brief

CSOPs are ‘discretionary’ share option plans (i.e. there is no need to offer participation to all employees) that allow individuals to acquire shares in their employer or its parent company. Provided the exercise price is at least equal to the market value of the underlying shares on the date of grant, no income tax, employer’s or employee’s NIC, or Apprenticeship Levy will arise on the exercise of a CSOP option, on or after the third anniversary of its date of grant (or on earlier exercise in certain takeover and ‘good leaver’ scenarios).

Companies should also receive a statutory corporation tax deduction, when their employees exercise CSOP options, equal in value to any growth in value of the underlying shares since the date of grant. Broadly, employees will be subject to capital gains tax on any difference between the price paid to acquire the shares on exercise and the proceeds of the sale of shares.

Why the Budget changes matter

This increase in limit, alongside other changes announced in the Budget, reflects the Government’s intention that CSOP should become the principal tax-advantaged option plan for companies that have outgrown EMI. To reflect this, as from Budget Day, CSOP has been rebadged by the Government as ‘EMI2’.

However, it’s important to keep in mind that the CSOP/EMI2 is a valuable tax-advantaged plan in its own right. Importantly, CSOP/EMI2 is available to companies of all sizes and all sectors, provided they are not controlled by another corporate entity.

The Government has confirmed that it is leaving the underlying legislative framework largely unchanged to avoid imposing additional administrative burdens for businesses already operating CSOPs/EMI2.

CSOP/EMI2 changes will be particularly relevant for companies:

• That, due to the nature of their trade, do not qualify for EMI (or no longer qualify due to the EMI size or trade tests);
• That have operated, or still operate, an EMI plan but key individuals already hold EMI options over the maximum value of shares (£250,000 valued at the date of grant) and there is a desire for them to receive more options – options over shares up to £120,000 can be granted to them under CSOP/EMI2;
• That had previously not considered CSOP/EMI2, due to its relatively modest existing grant limit; or
• That already have CSOP/EMI2 but have made little or no use of it in recent years - the Budget announcements provide a good reason to take another look.

What else is changing for CSOP/EMI2?

In addition to the limit changes, the Government has announced that the maximum period during which a CSOP/EMI2 option can be exercised in a tax-advantaged manner will increase from 10 to 15 years. The change will apply from 6 April 2027, but the Government has confirmed that CSOP/EMI2 options granted before that date can be amended to benefit from the new maximum period, without losing the tax advantages CSOP/EMI2 offers.

Further details on how this can be done, without jeopardising CSOP/EMI2 tax advantages, should be available once Finance Bill 2026-27 is published.

Why revisit CSOP/EMI2?

Historically, the relatively modest individual grant limit under CSOP/EMI2 meant that some companies either discounted its use entirely or found them of limited use, particularly when making awards to senior employees, or operating them alongside other incentive arrangements which did not have restrictive limits.

Additionally, for companies that qualified for EMI, in practical terms, granting EMI options to employees effectively precluded them from receiving CSOP options too. By removing the link to the EMI limits, individuals can now be granted additional options under a CSOP/EMI2 up to the new £120,000 limit.

What should companies do now?

Although these changes are only effective from 6 April 2027, companies should start to think now about how these changes may impact their approach to employee option grants.

Companies with an existing CSOP/EMI2 should consider existing and prospective headroom, existing option terms and their current incentive population to determine the grant policy going forwards.

Companies that do not currently have CSOP/EMI2 (including those which currently offer EMI) should consider how adopting such a plan might fit within their existing approach to equity reward strategy.

How can KPMG help?

We have extensive experience advising companies on the design, implementation and operation of all types of employee share plans. We can help guide you through all aspects of the existing rules as well as what the announcements might mean for your business in the future.

Please contact the authors or your usual KPMG contact if you would like to discuss this further.

For further information please contact:

• Chris Barnes
• Jo Brien