Budget: Key implications for employee share plans

Though there were no major announcements on employee share plans, other Budget measures will impact the benefit participating employees receive – and share plans’ effectiveness as incentives. Changes were also announced which impact employers’ costs and compliance risks. This article looks at the implications some key Budget changes could have for share plan participants and what employers might consider.

The employer’s NIC rate will rise from 13.8 percent to 15 percent from 6 April 2025, increasing the cost of providing employee shares outside tax-advantaged share plans.

For companies that meet the qualifying conditions, this cost could be mitigated by making awards under tax (and NIC) advantaged Company Share Option Plans (CSOPs), Enterprise Management Incentive (EMI) plans, Save As You Earn (SAYE or ‘sharesave’) option plans, and Share Incentive Plans (SIPs, which – despite their generic name – are a specific type of tax advantaged employee share acquisition plan).

Companies that don’t currently have a tax-advantaged share plan may therefore wish to consider whether the potential NIC savings mean that one (or more) of these plans should now be adopted – potentially to replace non-tax-advantaged share awards or cash awards. Similarly, companies that already encourage employee share ownership with tax-advantaged plans could consider whether it would be appropriate to rebalance total employee reward towards equity by increasing awards under those plans.

Some employers and employees agree that, as a condition of share plan participation, employer’s NIC liabilities that arise when shares are acquired can be recovered from the employee under a NIC agreement or transferred to them under a NIC election.

Employees obtain income tax relief for employer’s NIC borne which, from 6 April 2025, will give combined income tax and NIC rates on share-based employment income of 51 percent for a higher rate taxpayer, and 55.25 percent for an additional rate taxpayer, where employer’s NIC is recovered or transferred in full.

Employers who currently recover or transfer employer’s NIC in this way might therefore consider whether, given the increasing combined rate and its potential impact on the share award’s incentive effect, it would be appropriate to reduce the employer’s NIC recovered or transferred. 

Conversely, employers who do not currently recover or transfer employer’s NIC on share-based awards might consider whether it would now be commercially appropriate to do so.

From Budget Day (30 October 2024), and subject to certain anti-forestalling rules, chargeable gains on shares will be subject to CGT at 18 percent (up from 10 percent) to the extent they fall within any unused part of the basic rate income tax band. If the basic rate band has been fully utilised by income and/or other gains, gains on shares will be taxed at 24 percent (up from 20 percent).

Gains eligible for Business Asset Disposal Relief (BADR), which can include gains on shares acquired on the exercise of EMI options, currently remain subject to CGT at 10 percent. However, the BADR CGT rate will increase to 14 percent from 6 April 2025 and then to 18 percent from 6 April 2026 (creating an incentive for some employees to sell shares earlier than might otherwise have been the case).

Tax-advantaged share plans, which let employees access CGT treatment rather than income tax and NIC, therefore continue to offer considerable tax and NIC advantages to individuals, as well as NIC savings for employers (see above).

For example, a higher rate taxpayer would pay CGT at 24 percent (or less where BADR is available) on the value realised when shares are sold, rather than pay income tax and employee’s NIC at a combined rate of 42 percent on the value received when shares are acquired. Similarly, a basic rate taxpayer could pay CGT at 18 percent on disposal of their shares, rather than income tax and employee’s NIC at a combined rate of 28 percent on acquisition.

However, successive reductions to the CGT annual exemption mean that more employees than before will be taxed on the value they receive from tax-advantaged share plans, which could present challenges for large employers that offer SAYE or ‘sharesave’ options, though there are steps employers can consider to improve CGT efficiency for employees which we discussed in our earlier article.

Importantly, HMRC are focused on the fact that more employees will have CGT and other personal tax reporting obligations because of reduced allowances. In light of that, employers might also consider what communications and support it might be appropriate to provide, as our previous article outlines. 

Draft legislation for the Government’s new Foreign Income and Gains (FIG) and Overseas Workday Relief (OWR – officially referred to as ‘Foreign Employment Income Relief’) regimes, which will replace the current remittance basis of taxation for non-domiciled individuals from 6 April 2025, was published at the Budget.

In summary, share-based employment income that arises on or after 6 April 2025 (e.g. on the exercise of a share option), but which is treated as accruing prior to that date, will continue to be dealt with under the current rules, with ‘chargeable foreign securities income’ taxed on remittance to the UK.

Share-based employment income which is treated as accruing on or after 6 April 2025 will be subject to the new regime, with OWR available to qualifying individuals regardless of whether the relevant income is remitted to the UK. However, under the new OWR regime the total relief available each year will be limited to 30 percent of the individual’s ‘qualifying employment income’ or, if lower, £300,000.

Employers should monitor how the FIG and OWR rules develop as Finance Bill 2025 progresses through Parliament, and consider what impact the final rules might have on their employee share plan compliance obligations, the cost of tax equalising mobile employees’ share-based awards, and employee communications as part of their mobility programmes.

We’ll revisit the new OWR’s implications for employee share plans in more detail in a future article.

The Treasury launched a call for evidence on how ‘all employee’ tax-advantaged SAYE and SIP share plans might be simplified and improved under the previous Government. Whilst there was no update on this at the Budget, it is possible that further measures to encourage wider employee share ownership could be announced later in the year in conjunction with the new Government’s Make Work Pay programme and associated employment rights reforms.

In the meantime, please contact the authors or your usual KPMG in the UK contact, to talk through how the Budget announcements might affect your employee share plan, your workforce, and your business.

For further information please contact:

• Jo Brien
• Chris Barnes