Employee share plans post-budget – are they still worthwhile?

The recent 2024 UK Autumn Budget brought significant changes to the tax landscape, particularly with the increase in Capital Gains Tax (CGT). This has raised questions about whether employee share plans are still an effective method for companies to reward and retain employees. In this article, we’ll explore the implications of these changes and whether share plans remain a worthwhile incentivisation tool for employees and employers.

Overview of employee share plans

Employee share plans allow employees to acquire shares in their employer’s company, often at a discounted rate or with tax advantages. These plans can take various forms, including Enterprise Management Incentives (EMIs), Company Share Option Plans (CSOPs), Save-As-You-Earn (SAYE) schemes, Share Incentive Plans (SIPs), and non-tax advantaged plans such as growth shares and unapproved share options.

Key Autumn Budget changes affecting share plans

The 2024 Autumn Budget introduced several changes that directly affect the tax treatment of employee share plans:

• Increase in CGT rates: the rates of CGT on the sale of shares have increased from 10% to 18% for basic rate taxpayers and from 20% to 24% for higher-rate taxpayers. This change means that employees who sell shares acquired through share plans will face higher tax liabilities on their gains.
• Business asset disposal relief (BADR): the CGT rate for BADR, formerly known as entrepreneurs’ relief, will rise to 14% from April 2025 and to 18% from April 2026. This change impacts employees holding EMI options, as the relief will be less generous.
• Employer’s National Insurance contributions (NICs): the main rate of employer’s NICs will rise from 13.8% to 15% starting from April 2025. This increase will affect companies that offer share plans, as they may need to bear higher costs or pass these costs onto employees.
• Employee ownership trusts (EOTs) and employee benefit trusts (EBTs): The Autumn Budget also introduced anti-abuse measures for EOTs and EBTs. This included requirements to ensure that shares are sold at market value and an extension to the time period where EOT tax relief can be withdrawn.

Benefits for employees

Despite these changes, share plans can still offer significant tax advantages. Here’s a breakdown of the tax benefits:

• Income tax and NICs: employees can receive shares free of income tax and NICs within certain share plans, provided certain conditions are met. For example, with EMI options, employees do not pay income tax or NICs on the difference between the market value of the shares at the time of exercise and the amount paid for the shares, provided the exercise price is at least equal to the market value at the time of grant. This can result in substantial tax/NIC savings.
• CGT: shares acquired through share plans are often subject to CGT rather than income tax, which can be significantly lower. For instance, EMI options can qualify for BADR, provided certain conditions are met. The CGT rate on the disposal of the shares can be reduced to 10% on gains up to the lifetime limit (14% from April 2025 and 18% from April 2026), which is currently £1m. Growth shares, typically issued at a low initial value, can increase in value significantly if the company grows, and the gain on these shares is typically subject to CGT rather than the higher income tax rates. While CGT rates have increased, they remain significantly lower than income tax rates.

Benefits for employers

Employers also enjoy several benefits from implementing share plans for employees:

• Corporation tax relief: companies can claim corporation tax relief on the costs associated with providing shares to employees. This includes the cost of setting up and administering the share plan, as well as the value of the shares themselves. The relief can significantly reduce the overall cost to the company.
• Employer NICs savings: while the main rate of employer’s NICs will rise to 15%, companies can still benefit from NICs savings on certain share plans. EMI options, CSOPs, SIPs and SAYE plans can provide NICs savings if structured correctly.
• Enhanced employee retention and motivation: offering share plans can enhance employee retention and motivation, leading to increased productivity and reduced recruitment costs. This indirect financial benefit can be significant over time.
• Alignment of interests: share plans align the interests of employees with those of the company and its shareholders. This alignment can drive better business performance and, ultimately, higher company valuations, benefiting both the company and its shareholders.

The illustration below compares an employee receiving a cash bonus of £50k with a gain on an EMI option of that same amount, assuming the employee is a higher-rate taxpayer, the EMI options’ exercise price is £50k and the shares are sold for £150k post-April 2026.

As illustrated in the table, granting EMI options compared to paying a cash bonus can result in a higher net receipt for the employee and lower net cost to the employer.

Conclusion – are share plans still worthwhile?

While the increase in CGT rates and employer’s NICs does slightly reduce some of the tax benefits, share plans still offer significant long-term advantages. Importantly, the capital value received by employees through these plans is typically subject to CGT rates rather than higher income tax rates, providing further tax efficiency.

In summary, despite the recent Autumn Budget changes, UK employee share plans remain beneficial for employers and employees, both from a tax and cultural perspective. The structure of an employee share plan remains key to the success of the plan, as does the communication to participants. 

If you would like more information or have any queries about the areas mentioned above, please contact Martin Cooper.