The short version: An Incentive Stock Option lets you buy company shares at a discounted price, often with tax advantages. It’s a way employers reward and retain staff without just paying more salary.
What’s the tax benefit?
The main advantage is you don’t pay Income Tax or National Insurance when you buy the shares. HMRC doesn’t treat them as ordinary income at that point.
Tax only becomes an issue when you sell. If you make a profit above your Capital Gains Tax allowance, you’ll pay CGT on the gain. But CGT rates are typically lower than Income Tax rates, so you could end up better off than if you’d just been paid extra salary.
How is this different from regular shares?
If you buy shares normally and receive dividends, you pay dividend tax above your allowance. If you sell at a profit, you pay CGT. With incentive options, the tax efficient structure means you can potentially defer and reduce your overall tax bill.
Any rules to know?
There are usually conditions attached. You might need to hold the shares for a minimum period before selling. And there are limits on how much can be granted. Different schemes (like EMI or CSOP) have different rules.
Been offered share options and want to understand the tax implications? Let’s talk through what they’re really worth.
