Employee Share Plans Update - April 2024

SIP and SAYE Call for Evidence

At the beginning of this year we were eagerly awaiting the government’s response to its call for evidence on non-discretionary tax-advantaged share schemes, Save As You Earn (SAYE/Sharesave) and Share Incentive Plans (SIP), and there were hopes that changes would be announced at Spring Budget 2024. Although HM Treasury are working on this, it has not yet been published and no timeframe for its release has yet been confirmed. This is one consultation that we will continue to follow as it provides a great opportunity to widen employee participation by improving and simplifying SIP and SAYE plans.

Employment Related Securities Bulletin 54 (February 2024)

HMRC regularly provide employee share plan related updates through their collection of employment related securities bulletins. The most recent bulletin details changes to the Company Share Option Plan end of year return template and Enterprise Management Incentives notification deadlines from 6 April 2024, and annual filing deadline reminders. There is also a reminder that before submitting an ERS return or EMI notification, you need to save a copy of it for your own records.

EQ prepare the ERS end of year returns for plans that we administer and going forward we will produce these according to the updated guidance.

Reduction in National Insurance Contributions

The government’s Autumn Statement 2023 announced that the main employee rate of NICs was to be cut by two percentage points from 12% to 10% from 6 January 2024 and in March a further change was announced with a reduction to 8% from 6 April 2024. Any SIP participant documentation containing information about NICs, potential savings and example tables will need updating.

Capital Gains Tax (CGT) and ISAs

SIP - No CGT is payable when selling shares held in a SIP. If shares are transferred out of a SIP and disposed of later, the cost for capital gains purposes is based on their market value on the date the shares leave the plan.

SAYE - Buying shares under an SAYE option (‘exercising the option’), and then selling those shares is a chargeable event for CGT purposes.

The CGT Annual Exempt Amount was reduced from £12,300 to £6,000 in April 2023 with plans to reduce this further to £3,000 from 6 April 2024. As CGT cannot be collected through payroll, employees should be provided with 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.

One way of mitigating CGT is through transferring shares to a Stocks and Shares ISA. The ISA allowance for 2024/2025 remains at £20,000 with shares valued using their market value at transfer. Special rules mean that if you transfer shares to an ISA within 90 days of when they were taken out of the SIP or SAYE, there is no CGT to pay on any gains made. Where the 90-day period straddles the end of a tax year, two years’ ISA allowance is available. Putting shares into a flexible ISA, such as EQi’s Stocks and Shares ISA, provides additional opportunities as employees have the freedom to withdraw money, and pay it back in the same tax year, without it counting against the annual £20,000 ISA allowance.

Last year, we saw a big increase in the number of participants transferring shares into an ISA directly following their exercise of option and this is set to continue through 2024 as the CGT Annual Exempt Amount is reduced further.

At Spring Budget 2024 the government announced new measures to channel more investment into UK equities, including introducing a new UK ISA. The aim is to improve the competitiveness of the UK’s capital markets by opening new investment opportunities for individuals. The proposal is that the UK ISA will have an annual allowance in addition to the existing ISA allowance.

The government is looking for feedback and on 6 March 2024 issued the Individual Savings Account: UK ISA Consultation which is open until 6 June 2024. It sets out options for designing and implementing the UK ISA and aims to gather views on those options and their relative merits. The views expressed will inform the government’s final design.

There are currently four types of adult ISAs: Cash ISA, Stocks and Shares ISA, Innovative Finance ISA, and Lifetime ISA and individuals will be able to subscribe up to £20,000 across all ISAs for the tax year 2024/2025. The Lifetime ISA has its own subscription limit of £4,000 per year which forms part of the overall £20,000 limit. The proposed new UK ISA allowance of £5,000 will be in addition to the existing ISA allowance, providing an additional opportunity to support investment in the UK.

It will be a while before the UK ISA is launched and following consultation the government will confirm the final scheme design before bringing forward any necessary legislation. The consultation asks ISA providers how long it would take to launch a UK ISA, so the government can set out more detail on the timeframe for implementation.

Question 10 of the consultation seeks opinions on design features, and we would like the government to consider extending the 90-day rule applying to SIP and SAYE plans to the UK ISA, so that it will have the same tax benefits as a Stocks and Shares ISA. We know that most companies offering SIP and SAYE plans are UK FTSE 100, FTSE 250, FTSE All Share and AIM companies.

Dividend tax

The annual dividend allowance is set to reduce to £500 from 6 April 2024 meaning more individuals 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.

As a reminder, 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 requirement to tell HMRC if dividends are within the dividend allowance for the tax year.

SIPs and dividends

The income from cash dividends paid to SIP participants counts towards the employee’s annual dividend allowance. However, a SIP may provide for cash dividends to be used by the Trustee to acquire further plan shares on behalf of participants. These are known as “Dividend Shares” and must be held for three years (unless the participant leaves the company). Participants do not need to pay tax on dividend income used to purchase Dividend Shares if the Shares are held for three years.

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 have already seen changes to SIP Dividend Confirmation templates, plus additional information being provided to SIP participants.

More shareholders are likely to find themselves above the new allowance threshold for the first time and EQ will be providing wording to advise of the changes on our shareholder site, Shareview.

Private Intermittent Securities and Capital Exchange System

The government wants to channel more capital into equity markets in the UK and improve the competitiveness of the UK as a listing destination. As part of these reforms, the government has consulted on the Private Intermittent Securities and Capital Exchange System (PISCES), a new innovative market that will allow private companies to scale and grow, boosting the pipeline of future IPOs in the UK.

On 6 March 2024, HM Treasury issued a consultation setting out the government’s proposal for a new platform that will allow private companies to trade their securities in a controlled environment and on an intermittent basis.

Participating on PISCES will support companies to scale up and grow, providing liquidity, helping shareholders, including employee shareholders, to realise their gains, and providing an opportunity to companies to rationalise their shareholder base.

The government is considering whether to allow employees to buy shares of their companies on PISCES as they would be expected to have a greater awareness and understanding of investing in their company by virtue of their employment. PISCES could potentially support companies to manage employee share plans which involve the transfer of existing shares.

The consultation closed on 17 April 2024.

Investment Association - Letter to Remuneration Committee Chairs

The Investment Association (IA) has issued an update to Remuneration Committee chairs on the Principles of Remuneration and has highlighted those issues which are likely to a focus of IA members during the 2024 season.

These include:

• There needs to be clear alignment between pay and performance, especially when proposing higher executive remuneration.
• Inflation is still relatively high, investors expect companies to remain cautious, being clear on increases in executive remuneration in the context of all employee salary increases, the impact on the total remuneration for executives and executive remuneration in the context of stakeholder experience.
• Investors will consider any changes in Long Term Incentive Plans on a case-by-case basis, particularly in the context of the company’s performance and rationale provided.

Following feedback from companies during 2023, the IA will undertake a fundamental review of its Principles of Remuneration to be published later this year.

The message in the letter is clear that Remuneration Committees should demonstrate how their remuneration outcomes are appropriate given the company performance during 2023 and how it has set the 2024 targets.

The letter can be accessed via this link: Remuneration Committee Chair letter - Final.pdf (theia.org)