UK Budget 2024 - Impact on employee share schemes

The UK Budget 2024 saw changes which could impact the operation of employee shares schemes, as well as the tax benefit of these for employees. However, the impact was not as significant as was feared in some quarters and use of share schemes remains a valuable tool for incentivising and rewarding employees.

Capital gains tax

There are a variety of share schemes which allow employers to award employees in a tax-efficient way. Awards made to employees under such schemes are generally subject to the lower CGT rates, rather than subject to income tax and national insurance as employment income.

The Government announced a change in the rates of Capital Gains Tax (CGT). The lower rate of CGT will increase from 10% to 18%, and the higher rate from 20% to 24% with effect from 30 October 2024.

We have seen successive governments recognise the benefits of employees having a shareholding stake in their employer business, however employee share schemes were not protected from the increase in CGT rates.

Despite the changes eroding some of the benefit of tax efficient share schemes, the differential between CGT and income tax rates (and particularly with the increase in Employer NICs) means that share schemes remain a tax efficient way of incentivising employees.

Business Asset Disposal Relief (BADR)

BADR (formerly known as Entrepreneur's relief) is a relief from CGT which, provided certain conditions are met, reduces the rate of CGT on qualifying gains from 20% to 10%.

Under some tax-advantaged share schemes, such as EMI, the conditions of BADR are relaxed to make it easier for employees to benefit from the relief.

The government announced that BADR will remain, however the rate of CGT on disposals which qualify for BADR will gradually increase to reflect the changes to the CGT rates. From 6 April 2025, the rates on BADR and IR qualifying assets will increase from 10% to 14%. From 6 April 2026, both will increase further to 18% to match the new lower rate of CGT.

The lifetime limit for BADR will remain at £1,000,000.

Employer NICs

Employer NICs will increase from 6 April 2025 from 13.8% to 15%, with the thresholds at which employers start paying NICs reducing from £9,100 to £5,000.

Employers may wish to explore share incentives as an alternative means of rewarding employees, as there are various tax-advantaged share plans which offer a way of incentivising employees without incurring any tax or NIC charges.

In cases where employer NIC does arise on the award of shares under a share scheme, employers may be able to pass this cost onto the employee. Whilst it is generally the case that employers cannot transfer the Employer NIC liability to the employee, under a share option scheme employers may be able do so, provided the employee agrees. Employers using such schemes will have to consider carefully whether they wish to pass this cost onto the employee.

Employee Ownership Trusts and Employee Benefit Trusts

The budget also saw the Government announce a response to the consultation on Employee Ownership Trusts (EOTs) and Employee Benefit Trusts (EBTs) published in July 2023.

EBTs are trusts set up for the benefit of employees of a company. They are often used as a means to hold and issue shares to employees. EOTs are a type of EBT where the trustees own all or a controlling stake in a company for the benefit of its employees.

The Government has announced a series of reforms to the taxation of EBTs and EOTs, which are aimed restricting the favourable tax treatment in line with the intended policy purposes.

Such changes include the following:

Restrictions introduced preventing former owners (or persons connected to former owners) from retaining control of the company post-sale into an EOT by virtue of control of the EOT.

Requirement for trustees of an EOT must be UK resident at the time of disposal to an EOT

HMRC will no longer provide clearances in respect of transactions establishing an EOT

EOT income tax-free bonuses provisions were amended to allow directors to be excluded

Extension of the period of time relief can be withdraw from a former owner if the EOT conditions are breached following the disposal to the EOT.

Trustees of an EOT are required to take reasonable steps to ensure that consideration paid to acquire company shares does not exceed market value

Former owners claiming CGT relief must provide additional information in their tax return, such as consideration received and number of employees in the company

The inheritance tax exemption for EOTs will only be allowed where shares have been held for two years prior to settlement into an EBT

For the inheritance tax exemption for EBTs to apply, no more than 25% of employees who are able to receive income payments should be connected to the participators of the company