The Budget 2026 : Incentives & Remuneration

The Government's Call for Evidence on 'Tax Support for Entrepreneurship', has resulted in some very welcome changes to the UK's discretionary tax-advantaged share plans; Company Share Option Plans (CSOPs) and Enterprise Management Incentives (EMIs). 

It is encouraging to see the Government firmly acknowledging the important role employee share ownership can play in helping businesses attract, retain, and reward talented employees. We are also pleased to have played an active role in the consultation process that has formed these changes.

However, all-employee share plans such as Save-As-You-Earn (SAYE) and Share Incentive Plans (SIPs) have, yet again, been ignored. We share the disappointment expressed about this by the leading industry body ProShare, and we will continue to support reform of these plans so that the benefits can be accessed by a greater number of employees across all industries.

Re-branding and expanding Company Share Options

The Government is re-branding its offering of CSOPs into an offering of Enterprise Management Incentives 2 (EMI 2).

Under EMI 2, the old individual limit that applied to CSOPs will double from £60,000 to £120,000.  Further, employees will be able to hold the maximum number of tax-advantaged options under both schemes – £250,000 under EMI, and £120,000 under EMI 2 – simultaneously (a total of £370,000).  The option exercise period for EMI 2 will also be extended from 10 to 15 years (to mirror the same extension for EMI that was introduced last year), and this amendment can be applied to retrospectively.

Whilst these changes are very welcome, the re-brand of the name itself seems unnecessary and confusing. We understand that all other differences between EMIs and CSOPs (now EMI 2) will remain, although we await the legislation to confirm this.

To illustrate by way of example:

• CSOPs cannot be granted with an exercise price that is at a discount to market value, whilst EMIs can;
  
  
• CSOPs must be held for a period of three years before they can benefit from tax-advantaged exercise, whilst there is no such exercise condition for EMIs;
  
  
• CSOPs can continue to be held post-termination of employment indefinitely and still benefit from tax-advantaged exercise after three years. EMIs must be exercised within a specified period following termination of employment to fully benefit from tax-advantaged exercise; and
  
  
• Shares acquired following the exercise of EMIs benefit from 'Business Assets Disposal Relief' (BADR), whereas shares acquired following the exercise of CSOPs, do not.

This is a non-exhaustive summary but illustrates why the re-brand may lead to more confusion than perhaps intended.

The changes will apply from 6 April 2027 and will be introduced through Finance Bill 2026-27. Once the legislation has been published, businesses should review their option documentation and plan rules to make any necessary changes. 

EMI changes: practical improvements for businesses and employees

Two targeted changes to the current EMI regime have been announced in this year's Budget.

• First, the period during which an EMI option can be exercised and retain its tax advantages following a disqualifying event will be extended from 90 to 180 days.
  
  
• Second, the existing exception for companies controlled by an Employee Ownership Trust (EOT) will be widened to include companies arranging to become EOT-controlled.

The reforms are modest but welcome and, in theory, should allow EMI schemes to operate more effectively whilst supporting employee ownership. Employees will have more time to preserve favourable tax treatment after a disqualifying event, while companies moving to employee ownership should face less risk of participants losing EMI tax advantages during the transition. This should provide greater certainty for employers, participants and transaction advisers.

The changes will apply from 6 April 2027 and will be introduced through Finance Bill 2026-27. Once the legislation has been published businesses should review their option documentation and transaction processes to ensure participants can benefit from the extended timeframe and revised EOT protection.

Additionally, to ease the administration of EMI schemes (and bring them in line with other employee share incentives) it was announced at last year's Budget that the requirement to separately notify EMI options would be removed for awards granted on or after 6 April 2027.

From that date, EMI options will need to be notified in the annual return. One concern had been that, unlike other tax advantaged plans, notifying EMI options within the required time scale is a prerequisite to obtaining tax approved status.

In a welcome move, the Government has now confirmed that the legislation will be amended to provide that, where EMI options are notified in a late or amended annual return, the options will remain qualifying if the return is submitted within one year of the deadline date.

The Budget makes significant changes to capital gains tax (CGT) reliefs for business owners and investors.

The BADR lifetime limit has been halved to £500,000 from April 2027, increasing the effective CGT rate on gains above that threshold. A new Founders' Relief offers a more generous 10% rate on up to £10 million of gains, but its narrow qualifying criteria mean it will not be accessible to all those affected by the BADR reduction. In addition, minor technical fixes have been announced for the SEIS, EIS and VCT rules, alongside a commitment to improve the Advance Assurance process.

BADR: cut to lifetime limit

Business Asset Disposal Relief (BADR) reduces the CGT rate on the disposal of qualifying assets to 18%.

Currently the BADR lifetime limit is £1m but it has been announced that this will fall to £500,000 for qualifying disposals from 6 April 2027, with transitional provisions applying to contracts and share reorganisations entered, but not completed, before that date. The government notes that three-quarters of BADR claimants will still receive relief on their entire gain, with the reduction intended to refocus support on the start-up and scale-up phases of business.

For those whose qualifying lifetime gains exceed £500,000, the effective CGT rate on the excess increases from the current 18% rate to the main rates (24% for higher/additional rate taxpayers).

It may be advisable for individuals with anticipated disposals above the new threshold to consider accelerating the completion of such transactions before April 2027.  Shares acquired under Enterprise Management Incentive schemes (EMI) can benefit from BADR so this announcement will have an impact on those close to the reduced lifetime limit.

Founders' Relief 

While BADR has been limited, a new Founders' Relief will be introduced, providing a 10% CGT rate on up to £10 million of lifetime gains for qualifying founders of high-growth, innovative companies. While significantly more generous than BADR, the relief is expected to be harder to access in practice given the narrower qualifying criteria targeting founders who have made a "significant long-term contribution to the creation and development" of qualifying companies. 

For more analysis of this measure, see out commentary: Personal Taxes.

The interaction of the new relief with Enterprise Management Incentive schemes (EMI) deserves particular attention; founders holding sufficient equity to demonstrate the long-term contribution Founders' Relief likely requires risk exceeding the EMI regime's material interest threshold, which disqualifies individuals holding more than 30% of the ordinary share capital. Conversely, EMI participants with smaller shareholdings may struggle to satisfy Founders' Relief conditions. Those EMI participants' whose gains fall between £500,000 and £1 million but who cannot meet the new criteria for Founders' Relief face a worse position than under the current regime.

A technical consultation on the detailed qualifying criteria closes on 30 November 2026.

SEIS, EIS and VCT updates

Minor technical fixes are being made to SEIS, EIS and VCT rules in Finance Bill 2026-27, with the VCT relief withdrawal amendment applying from 6 April 2026 and remaining changes from 6 April 2027.

The government will also engage stakeholders on improving the Advance Assurance service and enhancing transparency around fund fees, whilst strengthening HMRC guidance and compliance activity on fee arrangements that divert investment away from qualifying companies.

Although somewhat modest changes, the commitment to improving Advance Assurance is welcome given the practical difficulties many early-stage companies experience with processing times and the certainty needed to close funding rounds.

There have been several, relatively minor but potentially consequential, changes affecting pay and benefits.

Employers will face significant payroll administration changes, with the mandatory payrolling of most benefits-in-kind (BiKs) being introduced in phases from April 2027, and an accelerated Class 1A NICs payment timetable creating potential cash flow pressures for those currently using voluntary payrolling. For employees, the £2,500 threshold for claiming employment expenses through PAYE will be removed from April 2028, reducing the need for them to have to deal with Self-Assessment.

In addition, the government has confirmed that reform around non-compete clauses is coming soon, but the shape of that reform remains unclear pending a formal consultation. Finally, the previously announced changes to the tax treatment of image rights arrangements have pushed back a year to April 2028.

Mandatory Payroll of Benefits in Kind

Currently, employers can choose to operate tax and Class 1A NICs on the benefits they provide to their workforce through payroll. Businesses have been aware of the government's plan to make the payrolling of most benefits compulsory for some time now. The Budget has confirmed that the legislation to bring the change into effect (in stages beginning from April 2027) will form part of Finance Bill 2026-7 (secondary legislation will set out the more detailed rules).

Phase 1 of the change will cover company cars and vans, car and van fuel and medical benefits with phase 2 bringing in most other benefits from April 2028.

Employers can apply for employees that are defined as "globally mobile" to be exempted from mandatory payrolling of benefits through a new online service. Importantly, it will not be compulsory to payroll employer provided loans and accommodation, although businesses can choose to do so.  Employers that payroll employer provided loans and accommodation on a voluntary basis should note that, from 6 April 2027, the Class 1A NICs due on these benefits will have to be paid in real time (i.e. monthly) rather than at the end of the year. 

Many employers already payroll their employee's benefits under the voluntary regime so this measure will not make a great difference to them.  However, the change to the date for paying Class 1A NICs will create cash flow issues and employers payrolling benefits on a voluntary basis might want to consider reverting to annual reporting under the P11D system.

HMRC guidance on the mandatory payrolling of benefits can be accessed here.

Reforming how taxpayers claim for employment expenses

If an individual wants to claim tax relief for expenses of their employment (such as professional subscriptions) of more than £2,500, they must do this through Self-Assessment, rather than by way of a coding adjustment under the PAYE system.

The government has announced in the Budget that it will remove the £2,500 threshold from April 2028 which will allow more taxpayers to claim tax relief on non-reimbursed employment expenses through PAYE.

This is a positive step for taxpayers as it will remove the need for them to complete a Self-Assessment return just to claim employment expenses. In the government's view, it will also make it easier for HMRC to administer claims and help to ensure that tax relief is given to those who are entitled to it.

The government has stated that it will keep the changes under review to determine whether there is a case for mandating the use of the PAYE route for taxpayers who are solely claiming employment expenses.

Restrictions on non-compete clauses

To protect a company's business interests when employees leave, service agreements often contain restrictions on the ex-employee's activities for a period following their departure.  These are known as "restrictive covenants", and a commonly used example is one that prevents an ex-employee from joining a competitor or setting up a rival business (known as a "non-compete" clause).

Following a government working paper published last year looking at options for reforming such clauses, the government has confirmed in the Budget that legislation will be introduced to make sure that non-compete clauses will "no longer be a barrier to hiring".

At this stage, we do not know how the reforms will be introduced. Options include:

• a total ban,
• a ban below a salary threshold, or
• the introduction of a statutory limit on the length of non-competes. 

It also is not known whether any prohibition or restriction on the use of restrictive covenants will extend to discretionary remuneration arrangements that sit outside of an employee's employment contract (such as bonus or share incentive plans).

We note that restrictive covenants can also be found in shareholders' agreements, partnership agreements and sale and purchase agreements as a mean of protecting legitimate business interests.

A government consultation is expected shortly that will also look at the wider use of restrictive practices (and may include things like notice, garden leave and other restrictions such as non-solicit and non-poach clauses). The government is then expected to set out a detailed position on these issues in early 2027 before legislating.  

Delay in changes to the tax treatment of image rights

Well-known sports personalities, such as footballers, often receive income for exploiting their image rights. Current market practice in the UK is for these arrangements to be structured through personal service companies (PSCs) with the individual's PSC licencing a player's image to the club they are employed by.

At the moment, the benefit of this is that image rights fees are treated as commercial income of the PSC rather than salary and can therefore be taxed at lower corporation tax rates (25%), rather than the higher income tax rates (currently 45% for additional rate taxpayers), and do not attract National Insurance contributions (as long as the fee paid is genuinely for the exploitation of image rights).

It was announced at Autumn Budget 2025 that legislation would be introduced (with effect from 6 April 2027) to treat all image rights payments relating to an employment as employment income subject to income tax and employee's and employer's NICs. In Budget 2026, the government announced that the changes will now be deferred to April 2028.