What does Schedule 3 paragraph 7 of ITEPA 2003 require for tax-advantaged share option schemes?

Paragraph 7 requires that every employee meeting the all-employee eligibility conditions must be eligible to participate in the scheme on similar terms. Additionally, every person who actually participates must do so on similar terms as other participants, ensuring fundamental fairness across the workforce in tax-advantaged share option arrangements.

Are variations in share option rights permitted under the similar terms requirement?

Yes, variations in participants' rights to obtain and exercise share options are explicitly permitted where they reflect differences in remuneration levels, length of service, or similar factors. For example, a scheme may scale option grants by reference to salary or years of service without breaching the similar terms requirement under paragraph 7.

Can a company grant different numbers of share options to employees based on salary?

Yes. A company can design a scheme where higher-paid employees receive larger option grants, provided the same underlying formula applies consistently to all eligible employees. For instance, granting options worth 10% of each employee's salary is permitted because the variation reflects remuneration differences under a uniform method.

What would breach the similar terms requirement in a tax-advantaged share option scheme?

Offering fundamentally different terms to selected individuals on an arbitrary basis would breach the requirement. For example, granting one employee options at 10% of salary and another at 20% without any objective basis linked to remuneration, service, or a similar factor would violate paragraph 7's similar terms condition.

Income Tax (Earnings and Pensions) Act 2003 Schedule 3 paragraph 7

Participation on similar terms

Schedule 3 paragraph 7 requires that eligible employees must be able to participate in a tax-advantaged share option scheme on similar terms, while allowing certain variations based on individual circumstances.

Every employee who meets the all-employee eligibility conditions must be eligible to participate in the scheme on similar terms
Every person who actually participates in the scheme must do so on similar terms as other participants
Variations in rights to obtain and exercise share options are permitted where they reflect differences in remuneration levels, length of service, or similar factors
The similar terms requirement applies both at the point of eligibility and at the point of actual participation

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