Autumn Budget 2024 – Employee Share Schemes

The new Labour government delivered its Autumn Budget on 30 October 2024. The budget is set to raise taxation in the UK to an historic high level, while maintaining the promise made in the Labour manifesto that there would be no rise in the rate of income tax, national insurance and VAT for individuals. This article briefly discusses the main tax issues, following the Budget, that affect employee share schemes and the likely impact that the Budget may have on employee share schemes.

The main relevant tax changes are:

• Employer’s national insurance contributions (NIC) – Effective from 6 April 2025, employer’s NIC (secondary Class 1, Class 1A, and Class 1B) will increase from 13.8 percent to 15 percent. The secondary earnings threshold (above which employer’s NIC is due) will reduce from £9,100 to £5,000 and then will rise in line with the Consumer Price Index from 6 April 2028. Also, for smaller businesses, the annual employment allowance of £5,000 will increase to £10,500 and the requirement for an employer’s NICs bill to have been below £100,000 in the previous tax year in order to qualify for the allowance will be removed
• Capital gains tax (for individuals) (CGT): For disposals on or after 30 October 2024, other than residential property and carried interest, the lower rate of CGT is increased from 10 percent to 18 percent and from 20 percent to 24 percent for higher/additional rate taxpayers. The rate for CGT where business asset disposal relief applies, will increase to 14 percent from 6 April 2025 and then again to 18 percent from 6 April 2026
• Official rate of interest on beneficial loans: From 6 April 2025, the official rate of interest that applies to determine the taxable amount due on beneficial loans to employees will be reviewed quarterly (currently reviewed annually)
• Share Incentive Plans (SIP): Participants contributing to tax-efficient SIPs are entitled to receive a statutory notice to explain the impact that deductions from salary may have on certain benefits, such as maternity benefits.  Since the passing of the Neonatal Care (Leave and Pay) Act 2023 (which gives parents additional paid time off from work if the babies require specialist care), such statutory notice must include a reference to this Act in the list of payments that can be affected by deductions from salary.

While the budget does not increase the rates of employment income tax or employee NICs due from individuals, the increase in the CGT for individuals and the rate of employer’s NIC will have an impact on the taxation aspects of employee share incentives. However, despite these increases, employee share incentives, in particular, tax advantaged share plans, will, in our view, continue to remain an effective an attractive tool to recruit, retain and provide incentives to employees to motivate growth.

Except for the tax-free gain on the sale of SIP shares, in tax efficient circumstances (which remain unaffected by the budget), the increase in the rate of CGT (including BADR) will mean higher taxes for employees on gains from the disposal of their shares. Nevertheless, the rate of capital gains tax remains significantly lower than the rate of income tax (and NICs) to encourage companies to provide employee with equity incentives via tax advantaged share schemes.

Non-tax efficient share options have, however, been impacted by the increased rate of employer’s NIC. An employee exercising such an option would not be affected by the increase in employers’ NIC where the employer’s NIC is not transferred to the employee. However, if  the employer’s NIC is transferred to the employee, the combined rate of tax and NIC for an additional rate taxpayer increases from 54.59% to 55.25%. Therefore, careful consideration should be given whether the employer’s NIC should be transferred to employees.

So far as SIPs are concerned, SIP trustees and administrators should be aware of the changes that they need to make to the statutory notices in view of the Neonatal Care (Leave and Pay) Act 2023; these changes take effect from the date of the Royal Assent.

Finally, we still await the government’s response to its call for evidence in relation to the SIPs and Save As You Earn schemes.

For further information contact JD Ghosh jd.ghosh@mm-k.com, Stuart James stuart.james@mm-k.com or Paul Norris paul.norris@mm-k.com.

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