Employee Share Plans Update – December 2023

A renewed focus in 2023 on Share Incentive Plans (SIPs) and Save As You Earn schemes (SAYE/Sharesave) through the government’s call for evidence provides a great opportunity to widen employee participation in these two tax advantaged share plans – by Graham Bull

 
It was a busy time leading up to the 25 August response deadline and including clients, our own EQ share plan experts, plus industry representatives, we listened to over 100 people interested in, and working with these plans.

We spent some time considering what changes might improve and simplify SAYE and SIP and some great ideas were discussed, though the suggestions with most support included:
 

• SIP – reducing the tax-free period
• SIP – amending the tax treatment for dividends
• SAYE – extending ‘good’ leaver provisions and
• SAYE – changing Capital Gains Tax treatment for exercises

 
Our response to the call for evidence included the names of 28 companies supporting some or all the recommendations that we would like the government to consider further. These companies represent nearly 300,000 SIP participants and over 250,000 SAYE accounts!

We now eagerly await the outcome of the consultation.

After nearly ten years, SAYE bonus rates are back with HMRC publishing a new savings prospectus that came into effect from 18 August 2023. To simplify how they’re set going forward, bonus rates are now linked to Bank of England Bank Rates.

In November’s Autumn Statement, the Chancellor of the Exchequer announced a reduction in National Insurance Contributions from January 2024. The government is also making changes to simplify ISAs and provide more choice, meaning it will be easier for people to choose the best ISA accounts for their needs.

Plans to reduce annual Capital Gains Tax (CGT) and dividend tax allowances remain. The reduction to the CGT Annual Exempt Amount reduced from £12,300 to £6,000 in April 2023 and will reduce further to £3,000 from April 2024. There has also been a reduction in the annual dividend allowance this year to £1,000, reducing to £500 in April 2024. Both changes mean more employees will need to consider tax implications when holding and selling shares.

Key changes impacting UK tax advantaged employee share plans and some further considerations are outlined below.

Key changes

• Capital Gains Tax
• Dividend tax
• Reduction in National Insurance Contributions
• SAYE (Sharesave) bonus rates

Capital Gains Tax

 
SAYE and CGT – Buying shares under an SAYE option (‘exercising the option’), and then selling those shares is a chargeable event for CGT purposes. HMRC statistics show average SAYE gains are over £3,000, so employees need to have information about CGT and their choices so that they don’t pay tax unnecessarily. Our article SAYE, CGT And EQi’s Flexible ISA looks at several ways of reducing CGT liabilities.

Where there are gains on SAYE schemes that we administer, EQ can provide participants with various choices at maturity. These include keeping shares, selling shares, transferring shares to a spouse/civil partner, or transferring shares into EQi’s flexible Stock & Shares ISA.

We usually see about 3% – 5% of participants transferring shares into an ISA directly following their exercise of option. More recently, with some schemes seeing larger gains at maturity, plus the reduction in the CGT Annual Exempt Amount, transfers directly into an ISA have soared and in some cases are above 50%.

As CGT cannot be collected through payroll, employees should be given information about how to pay it directly to HMRC, either through a Self Assessment tax return or simply using the ‘real time’ Capital Gains Tax Service.
 

Dividends Tax

 
The annual dividend allowance will reduce to £500 from April 2024 meaning more employees will need to arrange to pay tax on their dividends. This is a key communication point for employees, and employers should be aware of the potential for reasonably modest dividend income giving rise to a tax liability.

No tax is paid on dividend income that a) falls within an employee’s income tax-free Personal Allowance or b) is below the annual dividend allowance. How much tax is paid on dividends above the dividend allowance depends on the income tax band. Dividend tax rates in 2023/24 are 8.75% (basic rate taxpayer), 33.75% (higher rate taxpayer), and 39.35% (additional rate taxpayer).

There are two ways to pay dividend tax. Tax on dividends up to £10,000 can be paid through Self Assessment or by individuals asking HMRC to change their tax code with tax taken from their salary or pension. There is no need to tell HMRC if dividends are within the dividend allowance for the tax year.
 

SIPs and dividends

 
Cash dividends – When a company declares a dividend, the SIP Trustee arranges for cash dividends to be paid to SIP participants. This income counts towards the employee’s annual dividend allowance.

Dividend reinvestment – A SIP may provide for cash dividends to be used by the Trustee to acquire further plan shares on behalf of participants, referred to as “Dividend Shares”. Although employees can’t normally withdraw these Shares from the plan for three years, there is special tax treatment.

An estimated 11% of SIP participants* receive dividends over £500 per annum. We have seen an increase in companies reviewing the benefits of Dividend Shares, and analysis of SIP participants’ holdings along with the level of dividends paid in a tax year by the company, provides useful information.

We can model scenarios with varying dividend rates, providing information on potential tax impacts for participants. Where the SIP offers cash-only dividends, this analysis helps with reviewing the benefits of introducing dividend reinvestment. Where the SIP already offers a choice of cash or dividend reinvestment, identifying those currently electing for cash can help with considering whether further information about the benefits of reinvestment should be provided to participants. Even where there is compulsory dividend reinvestment, analysis can highlight the potential tax saving benefits of the plan.
 
_{*EQ analysis based on dividends paid on 487,481 SIP accounts over the period 6 April 2021 to 5 April 2022.}
 

Reduction in National Insurance Contributions

 
The government’s Autumn Statement announced that the main employee rate of NICs will be cut by two percentage points from 12% to 10% from 6 January 2024. SIP participant documentation containing information about NICs, potential savings and example tables will need updating.
 

SAYE (Sharesave) Bonus Rates

 
After nearly ten years, SAYE bonus rates are back with HMRC publishing a new savings prospectus taking effect from 18 August 2023. To simplify how they’re set going forward, bonus rates are linked to Bank of England Bank Rates. Further information can be found here.

We have seen over 60 SAYE schemes launch since the reintroduction of bonus rates in August. With the Bank of England Bank Rate remaining unchanged since 3 August, SAYE bonus rates have remained at 1.1 and 3.2 x the monthly contribution for three-year and five-year schemes. Nearly all schemes have included the bonus amount when calculating shares under option.

Updated wording to paragraph 7 of the savings prospectus states that the contract shall terminate unless the savings contract start date is within three months of the date of a new bonus rate applying. A similar principle applied previously, albeit linked to the publication of a new prospectus which used to happen each time there was a bonus rate change. As bonus rates change if the Bank of England Bank Rate changes, the Monetary Policy Committee announcement dates provide an indication on when bonus rates may change (bonus rates change 15 days after a Bank Rate change).
 
Graham Bull is Head of All Employee Shareplans at EQ >
 

 
Investing Basics: Save as You Earn and Share Incentive Plans >