Budget update: exciting changes to employee share plans

Yesterday, the Chancellor announced significant enhancements to the tax-favoured discretionary employee share plans, making them even more attractive for businesses and their management teams. The key changes are:

• The Company Share Option Plan (CSOP) has now been relaunched as the Enterprise Management Incentives 2 (EMI2) scheme.

• The individual option limit under EMI2 is increasing from £60,000 to £120,000. Until a few years ago, the limit was just £30,000.

• The limits for the existing EMI scheme and EMI2 will no longer interact — meaning eligible employees will be able to hold up to £370,000 worth of tax-advantaged options (£250,000 of EMI and £120,000 of EMI2) across both schemes.

• The maximum exercise period under EMI2 will increase from 10 years to 15 years (aligning with the EMI scheme).

These changes do not take effect until 6 April 2027 and so are of no immediate impact, but companies operating an EMI scheme should now seriously think about putting in place a CSOP scheme if they want to top-up share awards. While it may have been too politically difficult to increase the EMI personal limit, that is in effect what has happened by allowing a CSOP award also to be made even if the maximum EMI award has been granted.

Draft legislation will be published soon to give more details, but lobbying is already starting for the Government to take the opportunity to allow the renamed EMI2 plans to operate less restrictively than is currently the case. Compared with EMI arrangements, which are very flexible, EMI2 plans will unless action is taken be far less flexible and have to contain very prescribed terms on, for example, leavers, and the options will only be able to be granted with market value exercise prices. There seems no need for the two to differ.

But what about all-employee plans?

The focus of both the Conservative and Labour government over the last few years has been increasing personal option grant limits and company size thresholds for discretionary plans which are in essence plans for management.

It is odd that the all-employee plans remain unamended despite a consultation a few years ago leading to general recommendations to increase limits and also update the plans for modern working practices. Almost universally proposed ideas were to allow flexible savings and reduce the relevant periods before shares and/or tax breaks could be received.

Maybe this will be in next year’s Budget!

For more information, please contact our Share Plan & Incentives team—Nicholas Stretch, Desiree De Lima, and Luc Foley.