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Budget 2021: Employee share plans and the road to recovery


Whatever the Chancellor announces in his forthcoming Budget, employee share plans will continue to play an important role as companies move forward from the Covid-19 pandemic. The tax-advantages that share-based awards can enjoy are a key feature, however, equally important is the impact that share-ownership can have on boosting employee morale, motivation and aligning their interests with other investors.

Some have suggested that tax changes could be on the horizon for share plans. The government's commitment to the tax "Triple Lock" and the hole in public finances left by the pandemic have drawn many commentators to the conclusion that capital gains tax (CGT) changes are likely. Even if the Chancellor decides against dramatic reforms on 3 March, it is thought that he will look to introduce revenue raising measures in the autumn.

The Tax "Triple Lock"

This refers to the Conservative 2019 election manifesto commitment to not to raise the rates of income tax, National Insurance contributions and VAT during the current Parliament.  

For more information about the Triple Lock see this briefing

The impact of possible CGT reforms

One of the attractions of so-called "tax-advantaged" employee share plans such as CSOP, SAYE, SIP and EMI is that they can deliver gains that are taxed as capital rather than income. If (as some have suggested) the Chancellor uses the Budget to align CGT and income tax rates this would have a clear impact on such plans and might reducing the number of employees participating in them. Of more significance, particularly for those participating in all-employee plans such as SIP and SAYE, is the suggestion that the annual CGT exemption (which applies to gains of up to £12,300 for the 2020/21 tax year) will be abolished or reduced.  Many participants, particularly the lower-paid, would find themselves having to pay CGT and file a self-assessment tax return for the very first time. 

EMI options have proved a popular and effective way for high-growth, start-up companies to incentivise their employees. Shares acquired on the exercise of such options can benefit from business asset disposal relief (BADR – formerly known as Entrepreneurs' Relief) which reduces the rate of CGT to 10% when they are sold. Clearly, any moves to reduce (or indeed abolish) BADR would have a significant impact on these key incentives.

Not the end of the road for employee share plans

While a change to CGT is widely considered a distinct possibility, some have wondered whether Rishi Sunak will use the March Budget to go even further and alter tax-advantaged share plans (by reducing or removing their tax advantages). Such concerns have been driven in part by the recommendations of the Office of Tax Simplification (OTS) in its recent review of CGT. The OTS, whilst recognising that there are good social policy reasons for promoting share plans (particularly those that extend to all-employees such as SIP and SAYE), questioned whether they are the most cost effective approach to helping people save or encouraging long term share ownership. In a post-Covid recovery where many companies are struggling with low cash reserves and looking for other ways of incentivising their staff and re-invigorating their businesses, the role of tax-advantaged share plans is likely to be more important than ever. Over the years (during which the UK economy has experienced various peaks and troughs) share incentive plans have played an important role for companies and employees alike. If anything, this might be the time to enhance the benefits under share plans rather than restrict them although this is unlikely to be top of Mr Sunak's priorities. It is expected that tax-advantaged share plans will be left as they are – at least for the moment.

Tax-advantaged plans under a revised CGT system

Even if the changes discussed above are made to the CGT system, it is still worth remembering that there are other advantages to being within the capital gains as opposed to income tax regime. Key to this is the fact that CGT (unlike income tax in most cases) is not accompanied by the liability to pay National Insurance contributions. This is an important saving for both employees -especially those that are lower paid - and employers. CGT also benefits from a timing advantage in that it isn't payable until the shares are sold, thereby avoiding the "dry" tax charge that can arise when income tax arises on the exercise of non tax-advantaged share options. CGT is also collected under self-assessment up to 9 months after the end of the tax year rather than in real-time through the PAYE system. As noted above, if the annual CGT exemption is removed, this will create additional work for many participants in all-employee share plans that don't currently realise gains above the annual exemption – a move that could reduce take-up in such plans. 

Even if BADR is limited or abolished, EMI remains an attractive and effective prospect for smaller, high-growth companies that often can't meet the eligibility criteria for CSOP options. It should also be remembered that the potential benefits a participant can be offered under EMI are more generous than under CSOP (£250,000 worth of shares as opposed to £30,000 under CSOP). 

In summary, employee share plans are about more than just tax. Tax breaks are needed to encourage participation, but the part share plans play in giving employees a real sense of ownership and community shouldn’t be underestimated. In the road to economic recovery this might prove to matter most of all.


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