And breathe…
After many nail-biting weeks of speculation, last week we had the Autumn Budget from the new Chancellor, Rachel Reeves.
Whilst a variety of tax-related announcements were expected and have now arrived, many were waiting with nervous anticipation on how those announcements may affect share incentives for companies and their employees.
Capital Gains Tax (CGT)
One of the biggest areas of speculation was whether, and to what extent, the government may raise CGT rates.
This was of particular concern for companies operating share incentive schemes, and their participating employees, given any gains those employees arising from a sale of shares acquired through the scheme would often fall (in whole or in part) within the CGT regime. This is particularly the case for employees participating in tax-advantaged share schemes, such as enterprise management incentive (EMI) options or company share option plans (CSOPs), but also affects a lot of other private company share arrangements such as hurdle shares and nil-paid shares.
It was announced that from 30 October 2024 the main rates of CGT will be increased from 10% to 18% for basic-rate taxpayers and from 20% to 24% for higher-rate taxpayers. Whilst it is no surprise that the rates were increased, the amount of the increase itself is likely to be welcomed by many, with rumours circulating before the Budget that the upper rate might have been set to be raised as high as 39%.
Business Asset Disposal Relief (BADR)
Before the Budget, many were also questioning whether there would be a rise in the reduced CGT rates offered by BADR (previously known as Entrepreneurs Relief) or, more significantly, whether BADR would be abolished altogether.
BADR is tax relief entitling eligible individuals to claim a reduced CGT rate of 10% on their qualifying capital gains. Whilst the conditions which must be met to qualify for BADR are rather strict, they are generously relaxed in respect of the sale of shares acquired by employees from EMI options. The key condition for such purposes being that the employee is granted the EMI option at least two years before the sale of the shares and that the individual remains an employee throughout that two-year period.
But BADR is here to stay (for now), albeit with the CGT rate it offers gradually increasing over the next two years. The BADR rate will increase to 14% from 6 April 2025 with a further increase to 18% from 6 April 2026. The conditions which must be met for BADR, including the relaxed conditions for EMI purposes, have not been changed.
Employer NICs
It was announced that the Government will increase the rate of employer NICs from 13.8% to 15% from 6 April 2025.
This will mean that an increased employer NICs charge will arise for companies in respect of any incentive awards falling within PAYE. For example, the payment of a cash bonus or the exercise of a non-tax advantaged options in advance of an exit or over marketable shares typically results in an employer NICs charge arising.
This rise in the employer NICs rate may also give rise to an increased tax charge for employees on their exercise of their share options. This is due to it being permissible, and common in practice, for employers to pass on to the employee any employer NICs charge arising in respect of their share options (whether non tax-advantaged, EMI or CSOP). However, it’s worth flagging that the employee would receive some corresponding income tax relief in return for bearing that employer NICs cost, so it’s not quite an extra 1.2% cost for them.
Income tax and NICs vs CGT – where are we now?
One of the key advantages of share incentives is that, if structured correctly, they can often allow gains deriving from them to fall within the more favourable CGT regime. This may involve granting them pursuant to a tax-advantaged share scheme or structuring them in a tax efficient manner (such as growth shares).
The good news is that – while the numbers have changed slightly – there is still a substantial potential benefit to granting incentives which fall within the CGT regime, which remains significantly more favourable than the employment income tax regime. When you factor in employer NICs the effective tax rate on employment income for an additional (top) rate taxpayer in the UK is c.55%, so a modest increase in CGT (to a top rate of 24%) still means that there is a significant gap between the two.
Additionally, given cash rewards will become more expensive once the increased employer NICs rate is introduced, it's going to more important than ever for companies searching for cost savings to look to share incentives as a way to deliver benefits that save on cash reserves.
As a result, companies remain strongly advised to consider operating a share incentive scheme to attract, retain and incentivise its employees and the sooner the scheme can be implemented, the greater the potential advantages to be had.