Incentive Stock Option

An Incentive Stock Option gives an employee the right to buy stock shares at a discounted price. 

If your employer offers you company shares, you could get tax advantages. An example is not paying Income Tax or National Insurance on the shares’ value. This is because these incentive stock options are not seen as ordinary income in the eyes of HMRC.

What taxes will you need to pay?

The main benefit of shares bought through an Incentive Stock Option is tax-related. You basically won’t pay any tax on them when you first buy them. 

Here’s how it works: you decide to sell them after two years (the minimum period before you can sell). Then you make a profit over the Capital Gains Tax threshold (£3,000 in the 2024/25 tax year). At this point, you would have to pay Capital Gains Tax.

Why are Incentive Stock Options better than regular share options?

If you decide to set up an investment portfolio, you can end up paying the following taxes:

• When you earn dividends from your shares, if those dividends are over £500 (the dividend allowance this year), you need to pay dividend tax on them (either through your tax code or through a Self Assessment tax return)
• If you made profits from selling shares, and if those profits were over the Capital Gains Tax Allowance (£3,000), you need to file a tax return and pay Capital Gains Tax (CGT) on this profit
• When you receive shares in the company you work for, you might need to pay Income Tax and National Insurance – unless your employer applied for a special company share options scheme like CSOP or EMI

Buying shares through an Incentive Stock Option is a much better deal compared to regular shares or share options. This is because you’ll only be subject to CGT when you decide to sell your shares for a profit.