Autumn Budget 2024: Share incentives
Incentives did not play a main role in the chancellor’s speech with tax-advantaged plans broadly left untouched and a reminder that VCT and EIS had already been extended to 2035. Other key measures will have a knock-on effect such as the rise in employer class 1 National Insurance contributions and the forthcoming rise to business asset disposal relief. However, the relatively moderate changes to CGT should not impact on the traditional benefits of providing staff with capital treatment through equity incentives.
Changes to employer’s class 1 NICs
In the days leading up to the budget there were strong indications that the chancellor would announce an increase to employer’s National Insurance contributions (NICs). Employers currently pay class 1 secondary NICs on their employees’ earnings at 13.8% above an annual threshold of £9,100. Employers also pay class 1A NICs or class 1B NICs on certain taxable non-cash benefits at the same rate. There are certain benefits paid to employees which are not subject to employer’s NICs, including pension contributions.
In her budget speech the Chancellor announced an increase of 1.2 percentage points to employer’s class 1, 1A and 1B NICs bringing the rate up to 15%. Further, the threshold at which employers start to pay NICs was significantly reduced from £9,100 to £5,000. To counteract the effect on smaller employers, the Chancellor also increased the amount of employer’s allowance which increases the amount on which no NICs are payable. The changes will apply from the new tax year beginning 6 April 2025. The rise in employer’s class 1 NICs makes up £25bn of the £40bn in tax rises that were announced by the government under the budget.
The additional tax cost will increase the amount employers will need to pay when making incentive awards to UK staff that are subject to payroll tax. Some of this cost will result in an increased tax cost for the employee recipients as employee share incentives are one of the few exceptions to the rule prohibiting employers from recovering employer’s NICs from the individuals.
Even with the uplift in capital gains tax (see below), the increase in employer NICs means obtaining a capital return through equity-based incentive arrangements should continue to result in tax savings for the employer and the employee.
Changes to capital gains tax: main rates and BADR
The hotly anticipated rise in capital gains rates turned out to be a relatively moderate rise to the main rates: the lower rate has risen from 10% to 18% and the higher rate has increased from 20% to 24% with effect from 30 October 2024.
Business asset disposal relief (BADR) (formerly entrepreneur’s relief) which currently provides a flat rate of 10% for qualifying gains up to a lifetime limit of £1m was rumoured to be for the scrap heap but remains untouched for disposal up to 5 April 2025 at which point the rate will rise to 14% and then rise again to 18% for disposals made on or after 6 April 2026, when it will be aligned with the lower main rate of CGT. The Labour government has not changed the £1 million lifetime limit which was significantly reduced from £10 million in 2020.
The increase in rates will result in a higher tax bill for any employees selling their incentive shares. However, as the capital gains rate remains significantly below income tax rates (now a 23 percentage point difference in main tax rates vs. a 27 percentage point difference prior to 30 October), it’s unlikely employers seeking to incentivise staff through tax-advantaged share plans or non-tax advantaged share plans delivering a capital return will need to change their approach.
The upcoming changes to BADR will impact on EMI option holders who, provided their qualifying option was granted at least two years prior to sale, can benefit from reduced CGT rates on the disposal of their option shares. However, as the BADR rates will remain noticeably lower than the main CGT rates, there continues to be a dual benefit to EMI in providing capital treatment for employee share options along with lower capital rates.
Other changes to capital gains tax: carried interest
The capital gains rates applying to carried interest received by investment managers will also be increased to 32% (from a top rate of 28%) from April 2025 before a full reform to the regime is introduced from April 2026 which will seek to tax carried interest receipts within the income tax framework.
