Employee Incentives: Autumn Budget

The Autumn Budget delivered by the Chancellor, Rachel Reeves, on Wednesday 30 October, did not contain any specific measures to change the treatment of employee share or option plans.

This means that tax advantaged plans including Enterprise Management Incentives (EMI) and Company Share Option Plans (CSOP) are unaffected, although the rise in the rates of employer’s National Insurance Contributions (NICs) and Capital Gains Tax (CGT) will impact upon companies and employees.

A summary of the key changes for Employee Incentives is set out below:  

Capital Gains Tax (CGT)

The rate of CGT payable on a sale of shares for basic rate taxpayers has risen from 10% to 18% and from 20% to 24% for higher and additional rate taxpayers. The increase in the rates of CGT was with immediate effect. There are also anti-forestalling rules which may result in the new CGT rates applying to share disposals on share sale agreements that were entered into before 30 October 2024 where completion occurs after that date. 

While the increase in the rates of CGT payable on share sales has increased, the rates of CGT are still substantially lower than income tax and NICs. This means there remains an opportunity for companies to offer tax-efficient share or option arrangements that minimise exposure to income tax, whilst maximising the realisation of future gains on sale of shares at CGT rates.  

Employers’ National Insurance Contributions (Employer NICs)

Class 1 employer NICs will be increased from 13.8% to 15% from 06 April 2025. 

The increase in the rate of employer NICs will impact upon share or option plans where income tax becomes due under PAYE.  Companies may still secure savings in employer’s NICs under tax advantaged share and option plans, where exemption from income tax and NICs apply.

Business Asset Disposal Relief (BADR)

Relief under BADR will continue, although the benefit will be progressively reduced. The rate of BADR is currently 10%. It will increase from 10% to 14% if claimed by taxpayers (who are eligible for BADR) on sales of shares from 6 April 2025.  The rate will increase again to 18% for sales of shares from 6 April 2026.

For employee incentives, the changes to BADR will broadly impact upon holders of EMI options.   This is because eligibility for BADR usually applies to a 5% shareholder who is a director or employee of the company and has held the shares for at least two years. This does not apply to EMI where the requirement that the option and shares (which may be less than a 5% stake) must have been held for a period of two years before sale.

The retention of BADR for EMI acquired shares continues to represent a tax-efficient incentive for companies that are eligible to offer EMI.  This will enable companies to offer participation selectively to employees in a tax advantaged way, with the ability for employees to realise gains at the lowest rates of CGT.

The Birketts view

While the Autumn Budget has delivered a programme of significant tax increases over the next five years, tax advantaged share and options are unchanged and share incentives will continue to offer companies and employees tax efficiencies.  

If you would like advice on the implementation or administration of share incentive schemes within your organisation, please feel free to get in touch with any member of the Employee Incentives team here at Birketts.