The UK Chancellor of the Exchequer, Kwasi Kwarteng, delivered his Growth Plan 2022 to Parliament on 23 September. Whilst not a full Budget or Autumn Statement, the “Fiscal Event” (as so named by the Chancellor) has proven to be a significant moment for the UK economy.
The Growth Plan is wide ranging and includes the Government’s approach to regulation, enterprise and tax to deliver greater levels of growth in the UK economy. Reaction to the Plan has been decidedly mixed at best, but the level and breadth of tax cuts alone is almost without precedent in UK politics.
In this newsletter, we aim to pull out the main incentives related issues and comment on their likely impact over the weeks and months ahead.
Starting with tax and social security…
National Insurance cut early! Health and Social Care Levy abolished!
The 1.25% increase to the rate of National Insurance Contributions ("NICs"), which took effect in April 2022, will be reversed from 6 November 2022. NICs rates will revert to 12% and 2% for employee NICs and 13.8% for employer NICs. These changes were due to take effect from 6 April 2023 when the Health and Social Care Levy was due to be implemented.
Instead, the reduction in NICs rates has been accelerated and the Health and Social Care Levy will no longer be introduced.
These are the proposals which will be most immediately implemented. The tax-based proposals, as we see below, will all take effect from the start of the tax year 2023/24.
Income tax cuts! (England and Wales only)
The additional rate of income tax, currently charged at 45% on income of more than £150,000 per tax year, is NOT being abolished. The Chancellor announced it would be and then decided it would be best for his career if it was kept in place. So, it’s staying, for now.
In addition to this, the basic rate of income tax is being reduced by 1% to 19%. This is another accelerated change which was going to take effect from April 2024. Instead, it will take effect from not 6 April 2023.
The basic rate tweak applies only in England and Wales and will not apply in Scotland, which sets its own tax rates and thresholds.
Otherwise, the previously announced income tax thresholds and £12,570 Personal Allowance for the tax year 2023/24 are unchanged.
In particular, note that individuals with income of more than £100,000 will continue to have their Personal Allowance tapered, losing £1 of allowance for every £2 of income over £100,000. This means that individuals with incomes of more than £125,140 will not be entitled to any Personal Allowance. They will be subject to a marginal rate of income tax on this income which is effectively 60%.
The fiscal event was not well received and the attempt to cut the additional rate in particular went down badly. It’s not likely to be going anywhere for the foreseeable. Unlike the Chancellor. The reduction in NICs and income tax basic rate will still be gratefully received by employers struggling with price increases caused by the cost-of living-crisis. Like mortgage payments.
We noted with interest that the Growth Plan did not address the tapering of the personal allowance. Since the Growth Plan intended to (amongst many other things) deliver greater levels of tax rate competitiveness and simplification, the taper rule, which is complex, and delivers high tax on income over £100,000, might be subject to amendments or abolition in the future.
Finally, as we noted above, the Growth Plan has sent shockwaves throughout the UK economic and political worlds. We may see refinements being made to its measures. The UK Labour party has indicated that a Labour government would reintroduce the 45% rate. The position needs to be monitored as it continues to develop.
Tax Advantaged Company Share Option Plans
From 6 April 2023, qualifying companies will be able to issue up to £60,000 of CSOP options to employees, double the current £30,000 limit. The government has also announced that the “worth having” qualifying conditions for CSOP (conditions that require CSOP options to be granted over a class of shares that deliver overall control of the company or that are held by the majority investors) will be removed for CSOP options granted from 6 April 2023. These changes will better align the CSOP rules with the rules on the Enterprise Management Incentive scheme and should widen access to CSOP for growth companies.
Breaking “news” – HMRC Bulletin 45
Following publication of the Growth Plan, the UK tax authority, HMRC, issued its latest Employment Related Securities Bulletin (45) which confirmed the CSOP limit increase and that the “worth having” test would be removed – both changes will be made by statute in due course.
The Bulletin also referred to HMRC’s previously stated intention to review the basis upon which interest and bonus rates are calculated for tax advantaged save as you earn (or SAYE or “Sharesave”) options. The Bulletin confirmed that this is still being looked at.
The CSOP limit increase is great news! It will make CSOPs much more appealing, as they have been in decline in recent years due to the long standing £30,000 limit being considered to be inadequate. Complicated qualification rules also deterred take -up of a potentially useful incentive. We were worried that CSOPs might be for the chop given that the “old” limit was not big enough to make these plans worthwhile for many companies. We are pleased to see that the Government sees their potential by acting to increase their attractiveness. We may also see a return to the use of CSOPs in parallel with other long-term incentives. Given the climate of uncertainty surrounding much of the Growth Plan, we think this change will stick and ensure CSOPs are here to stay.
The CSOP changes will be made by statute and, one would imagine, this would be passed before 6 April 2023. If you consider taking advantage of these changes in April next year, then we recommend keeping an eye on if this has actually happened, given that other announced changes to tax advantaged plans have not always been followed by legislation passed in time for the due date, and right now it looks like the Government has its hands full.
On that note, given recent interest rate rises announced by the Bank of England and the impact of the Growth Plan, we assume that the chance of SAYE interest rates rising above 0% is increasingly likely.
Other tax-based proposals of note:
- Reversal of the 1.25% increase in dividend tax rates (as well as the additional rate of dividend income tax) with effect from April 2023 (so the top rate of income tax on dividends will return to 38.1% from 6 April).
- Maintenance of the current 19% corporation tax rate (cancelling the planned increase to 25% which was going to come into force next year).
- Repeal of off-payroll working rules (IR35), with effect from April 2023, and IR35 reforms introduced in 2017 and 2021 will be abolished. This means that workers providing their services via an intermediary will once again be responsible for determining their employment status and paying the appropriate amount of tax and NICs, rather than the service recipient.
- No employer NICs will be payable on salaries for new employees in Investment Zones on earnings up to £50,270.
- The Stamp Duty Land Tax (SDLT) threshold for purchases of residential property in England and Northern Ireland is to be increased to £250,000 for all buyers, and to £425,000 for first-time buyers. The threshold for the value of properties qualifying for the enhanced nil rate band for first-time buyers will be increased to £625,000. These measures will take immediate effect.
- The Office of Tax Simplification (OTS) will be abolished!
The Growth Plan contains a wide range of reforms, some of which will deliver clear results during the current challenging economic climate, whereas others, such as the repeal of part of the IR35 rules, are being made to simplify and streamline the UK tax framework. There will be a cost to these measures and it’s unclear whether HMRC will have the resources to properly police the tax status of self-employed contractors. Revenues might be at risk.
We are intrigued to see the abolition of the OTS – does this mean tax cannot get any simpler? We suspect not.
There were many other changes announced but another eye-catching incentive related measure concerns bankers’ bonuses…
Bankers’ bonus cap to be scrapped!
It was announced that the government will scrap the cap on bankers' bonuses that is currently in place for UK regulated banks and certain investment firms. This cap restricts the variable remuneration of staff members who are identified as ‘material risk takers’ to 100% of their fixed remuneration, or up to 200% where qualified shareholder approval is obtained. It has been reported that the UK’s financial services regulators, the Prudential Regulation Authority and the Financial Conduct Authority, intend to consult on the removal of the cap during this Autumn. The rules set out in their rulebook and handbook, respectively, will need to change to give effect to the removal of the cap.
The aim of this change is to remove the limit on variable remuneration for the senior staff members working within impacted firms to help those firms to more effectively compete with firms that are located within other jurisdictions where there is no bonus cap, including New York and Singapore, and possibly also to attract staff from EU jurisdictions that will continue to retain the bonus cap. This measure may therefore help banks based in the UK to recruit more easily from overseas. On paper, this may seem like an attractive change for impacted firms, but the position may be trickier in practice.
As the bonus cap established a permitted ratio between variable and fixed remuneration, the higher the fixed remuneration then the more variable remuneration that could be awarded. This meant that firms who wanted to compete with non-EU and non-UK firms on total remuneration (that is, variable plus fixed remuneration) needed to increase the fixed remuneration for impacted staff so that larger amounts of variable remuneration could then be awarded. This higher fixed remuneration will be comprised of higher salaries and also fixed allowances which, to be compliant with applicable regulatory guidance, should be permanent and non-revocable.
The removal of the bonus cap may mean that firms can start offering new joiners lower fixed remuneration but the prospect of larger variable remuneration, although in doing so, they might find that the package on offer would not be competitive when benchmarked against a market that currently offers higher amounts of fixed remuneration. Equally, firms will likely face difficulties when attempting to restructure remuneration for existing staff members, who may resist requests for them to accept a reduction in their guaranteed fixed remuneration in return for the opportunity to receive a larger amount of variable remuneration. These example scenarios demonstrate some of the legal and operational challenges that firms will likely face in practice.
Impacted firms should start thinking about how this change will impact their remuneration structures for impacted staff. Further details, including on when these changes will take effect, will come out of the expected consultation.
As always, if you have questions about any of the content of this alert, or there is any assistance you need in relation to your share incentives, do not hesitate to contact us.
Chris Fallon, Matthew Hunter and Gemma Morgan