18 November 2022
In our last alert, we noted the government’s U-turn in which key tax measures announced in September’s controversial mini-budget were reversed. Since then, Rishi Sunak has become Prime Minister and, whilst previous market turbulence has calmed a little, economic challenges remain, with inflation continuing to rise and the Office for Budget Responsibility (OBR) confirming that the UK is now in recession. In yesterday’s Autumn Statement, Jeremy Hunt, the Chancellor of the Exchequer, has announced a number of tax rises and spending cuts in the aims of reducing inflation and stimulating growth.
Below are the main issues relevant to the operation of share incentive plans and our thoughts on their likely impact.
Income tax: the top 45% additional rate of income tax will be paid on earnings over £125,140 instead of £150,000. A freeze for the personal allowance and higher rate income tax thresholds until April 2028 was announced, which means as wages rise, millions of people will pay more in tax.
A reduction in the income tax additional rate threshold had been widely reported ahead of the Autumn Statement, with some commentators pointing out the potential interaction between this threshold and the tapering of the personal allowance on earnings over £100,000. It has now been confirmed that the threshold will be aligned with the point at which the personal allowance is lost in full. The cost of the change for current additional rate payers will be £1,243. The freezing of the higher rate threshold, with the result that more people will be brought into the 40% band as salaries increase, may have a greater impact for the individuals affected.
Capital gains tax and dividend allowance: the individual capital gains tax annual allowance will be cut from £12,300 in 2022 to £6,000 in 2023. This will fall again to £3,000 in April 2024. The dividend allowance will be cut from £2,000 to £1,000 next year and then to £500 from April 2024.
Again, reductions in these allowances had been expected. Looking ahead to further cuts in April 2024, many more taxpayers are likely to be within the scope of tax on capital gains and dividends. From a share plans perspective, employers should be aware of the potential for reasonably modest dividend income and gains from shares acquired through share plans giving rise to these additional tax liabilities. A renewed focus on informative communications as well as appropriate levels of financial education may come onto the agenda in light of these changes.
National Insurance: following the abolition of the Health & Social care levy under Liz Truss’s administration there is no further change to rates of National Insurance Contributions (NICs). The main upper thresholds are frozen until April 2028. The secondary threshold (at which employers start to pay secondary contributions) will also be frozen for the same period. The Government points out, however, that the Employment Allowance will be retained at the new higher level of £5,000 which means 40% of all businesses will still pay no NICs at all.
After a number of changes in relation to national insurance contributions over the last few months, it is helpful that there are no further significant developments. The impact of the threshold being frozen will need to be budgeted for – however, there is still the potential for further change in the interim, in particular given there will be a General Election ahead of 2028.
Company Share Option Plan (CSOP): the Autumn Statement includes confirmation that, as previously announced, “the government is increasing the generosity and availability of the Company Share Option Plan”. It is assumed at this stage, that the proposed changes will remain as set out in ERS Bulletin 45, with a doubling of the CSOP limit to £60,000 and removal of some of the share class restrictions which have previously made it harder for some, mainly unlisted, companies to qualify.
This is a welcome change to the CSOP regime. The government also notes that it remains supportive of the Enterprise Investment Scheme and Venture Capital Trusts and sees the value of extending them in the future. There is no mention of the Enterprise Management Incentive plan, however, which suggests that the government sees its changes to the CSOP regime as addressing certain issues raised on the restrictive nature of qualifying conditions which have made it difficult for some companies to offer tax-advantaged employee share options.
We have picked out just a few key changes which may be relevant to share incentives. The Autumn Statement also contained many more announcements of relevance to individuals and business as the government works to establish fiscal stability in a period of economic challenge. As the impact of the tax announcements mentioned above takes hold, companies may wish to revisit their share plans to make sure not just the plans themselves, but also the communications and education around the plans, remain effective in the current context.
If you want to discuss any of the points above or want help with your share plans or other incentive arrangements, please do contact us.
Suzannah Crookes and Sally Blanchflower