Incentivising staff is about to get more expensive – putting tax-efficient share arrangements in the spotlight
The introduction of the new Health and Social Care Levy approved by the House of Commons yesterday, will put further pressure on employers already faced with rising employment costs.
In addition to the current 13.8% rate of employer national insurance contributions (NICs) and the apprenticeship levy, from April 2022 employers will need to pay the new 1.25% levy on any employment income they provide to employees and directors. This includes salary, bonuses and any taxable benefits, including non tax-advantaged share incentives that fall within the PAYE regime. Employees will also be subject to the new 1.25% levy on such income on top of income tax and employee NICs, and so in effect the changes will result in an extra 2.5% aggregated levy on employment income.
Now more than ever, companies looking to make savings will be keen to explore the viability of tax-advantaged incentive structures – bringing into sharp focus formal HMRC-approved employee share plans that offer tax reliefs, and other reputable mechanisms that enable benefits to delivered to employees and directors in a tax-efficient manner.
Save-As-You-Earn (SAYE) plans and Share Incentive Plans (SIPs) are well-known routes to delivering tax-free share gains on an all-employee basis and are often seen as a valuable benefit by a broad staff population. For SMEs with fewer than 250 full-time equivalent employees, Enterprise Management Incentive (EMI) options remain the gold standard, allowing companies to grant options over up to £250,000 worth of shares at grant which are broadly free of income tax and NICs when eventually exercised - if they can meet the eligibility criteria. Other companies wanting to utilise share options might consider using a Company Share Option Plan (CSOP), which allow companies to grant options up to a limit of £30,000 worth of shares at grant, which can be exercised free of income tax and NICs after three years.
Although they must be operated in line with HMRC’s rules and certain eligibility requirements apply, HMRC backed plans are relatively straightforward to set up and maintain when compared with their potential value to employees.
Private companies which are unable to make use of EMI options might alternatively consider the use of hurdle shares or nil paid shares, which allow employees to acquire the shares either cheaply (in the case of hurdle shares) or on a deferred payment basis (in the case of nil paid shares) and enable employees to come within the capital gains tax regime on any growth in the share value following acquisition.
Many employers are already also linking salary sacrifice arrangements to pension schemes and other benefits for tax or NICs savings, but they might consider whether they can additionally implement salary sacrifice mechanisms in connection with management share investment arrangements.
As well as potential tax, NICs and levy savings, enabling employees to acquire company shares as part of their incentive packages has the additional benefit of aligning employees’ interests with those of the company’s shareholders – incentivising employees at all levels to help the company’s share price to increase.
If you would like to discuss the potential cost savings available on your company’s staff incentives, please contact Kathy Granby at firstname.lastname@example.org.
The tax will begin as a 1.25 percentage point rise in National Insurance from April 2022, paid by both employers and workers, and will then become a separate tax on earned income from 2023 - calculated in the same way as National Insurance and appearing on an employee's payslip.