As expected by many industry commentators, the Chancellor, Rachel Reeves, announced an increase to Capital Gains Tax (CGT) on shares in her Autumn Budget on 30 October 2024.
The lower rate of 10% and the higher rate of 20% were increased to 18% and 24% respectively. These increases were not, however, accompanied by a corresponding rise in the CGT annual exempt amount, which will remain at £3,000 for individuals.
Tax-advantaged employee share schemes were not protected from the increased rates, as some had hoped. These schemes are designed to attract, retain, and incentivise employees by offering them shares or share options which can be exercised at a later date. Unlike more traditional cash-based compensation such as bonuses, which are subject to income tax, gains made through a tax-advantaged employee share scheme are subject to CGT.
The core concern surrounding the changes brought by the budget for participants of tax-advantaged employee share plans is therefore undoubtedly that higher CGT rates will result in greater taxation on share gains. While these concerns may raise doubt as to the tax efficiency of such schemes, it is important to recognise their enduring value to employees, even in the face of heightened tax burdens.
Tax-advantaged schemes all offer distinctive tax benefits that can help to reduce tax liabilities for employees and employers alike. This includes schemes such as:
- Enterprise Management Incentives (EMIs);
- Share Incentive Plans (SIPs);
- Save As You Earn (SAYE); and
- Company Share Option Plans (CSOPs).
The difference between CGT and income tax rates, even post-budget, mean that these schemes will continue to offer participants lower tax liabilities than cash bonuses or non-tax advantaged share incentives. While the benefits to employees are therefore apparent, it is important to recognise the corresponding benefits to employers.
Increased organisational alignment assists with employee motivation, encouraging increased revenues and overall growth, which should drive share price increases for investors. With shares vesting over time, employers benefit from reduced immediate cash expenditure and enhanced employee retention. It is clear to see how, despite the tax increases, employee share schemes will remain a useful tool in company development.
Another significant change that was announced in the budget, which will undoubtedly have an impact on employee compensation strategies, was the increase in employer’s National Insurance Contributions (NICs).
From 6 April 2025, employer’s NICs will be increased from 13.8% to 15%. Additionally, the earnings threshold at which NICs are due to be paid by employers was decreased from £9,100 to £5,000. From a company perspective, tax-advantaged share plans will offer greater savings for employers on their NICs bill and so it is likely that in the coming months we will see greater uptake.
In essence, many of the anticipated tax rises from the budget materialised, however, the overall benefits from tax-advantaged share plans remain in place and are still attractive. Ultimately, the crucial benefits of employee share schemes will remain in their ability to support the recruitment and retention of key employees, and align their interests with those of shareholders.
If you have any queries on employee share plans and how they can help your business, please contact a member of our share incentive specialist team, who will be happy to help.
This article was co-authored by Trainee Eva Curran.