Employee Share Plans Update - March 2023

At the Spring Budget 2023, it was announced there will be a call for evidence on SIP and SAYE. The aim is to seek views to enable the UK government to consider how to improve and simplify them. In addition, a Private Members’ Bill, the Employee Share Ownership (Reform) Bill, is provisionally scheduled to be debated in the House of Commons on 24 November 2023, providing an opportunity to discuss how to modernise employee share plans and employee share ownership.

This renewed focus on SIP and SAYE provides a great opportunity to widen employee participation in these two tax advantaged share plans. EQ will be responding to the call for evidence and we would love to hear your thoughts and suggestions for change.

The government also announced amendments to EMIs.

These changes, as well as those announced in last year’s Spring and Autumn Statements, September’s Growth Plan and various HMRC reviews, mean there are some key changes impacting UK tax advantaged employee share plans. We thought that it would be useful to summarise some of these by putting the spotlight on eight important areas.

An outline of the changes, along with information about key take-aways and how EQ can help, is provided through the links in the table below.

An outline of the tax advantaged employee share plans we discuss in this update is shown in the table below.

If you would like further information about any of these plans and the changes impacting them, or you would like to share your suggestions for the call for evidence on SIP and SAYE, please contact your relationship team.

The information in this update has been prepared for general informational purposes only, and is not intended to provide, and should not be relied on for, tax information or advice.

Capital Gains Tax (CGT)

The government will reduce the CGT Annual Exempt Amount from £12,300 to £6,000 from April 2023 and to £3,000 from April 2024, meaning more employees will need to think about CGT when making decisions about holding and selling shares received through their employee share plans. 

SIP – Tax advantaged SIPs have a special CGT benefit. If employees hold shares in a SIP until they sell them, CGT will not be due on any gains made, enabling them to enjoy unlimited capital gains in the value of their SIP shares. Reducing the Annual Exempt Amount can make holding shares in a SIP more attractive.

SAYE/CSOP/EMI – Buying shares under option (‘exercising the option’) and then selling those shares is a chargeable event for CGT purposes. Reducing the Annual Exempt Amount can potentially mean more employees paying CGT.

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.

 There are, however, a number of ways of reducing CGT liabilities and include:

• Using the CGT Annual Exempt Amount and considering selling shares over consecutive tax years.
• Transferring shares to an ISA from a SAYE plan. The ISA allowance for 2023/24 will remain at £20,000. Special rules apply to SAYE plans that mean that participants putting their shares into an ISA do not pay CGT on the transfer or the later sale if they are transferred within 90 days of exercising the option. Where the 90-day period straddles the end of a tax year, two years’ allowance would be available.
• Transferring shares to a ‘flexible ISA’ from a SAYE plan has similar features with additional freedom to take out cash and replace it in the same tax year without affecting the current year’s allowance. In practice this means participants can put shares into a flexible ISA, sell them, remove the cash and then replace them with any remaining SAYE shares. This process can happen numerous times within the permitted 90-day period.
  • Example: You exercise your SAYE option and pay £10,000 for the shares. On the day that you buy those shares the market value is £25,000, a gain of £15,000.
  • Your flexible ISA allowance is £20,000 and you put £20,000 of shares into a flexible ISA.
  • You then sell some shares and withdraw £5,000.
  • You can then transfer the remaining shares with a value of £5,000 into the flexible ISA within the same tax year with no CGT liability as long as it is within the permitted 90-day period.
• Transferring shares to a spouse or civil partner so they can use their CGT Annual Exempt Amount.

Key take-aways

• There are a number of ways to manage CGT.
• It’s a good time to reconsider the benefits of a SIP.
• Employees making gains when exercising their options should be given detailed information about how to mitigate any CGT liability.
• There are special tax benefits for participants transferring their SAYE shares into an ISA.
• Employees who do not complete a Self Assessment tax return can simply use the ‘real time’ Capital Gains Tax Service to account for CGT.

How EQ can help

Please contact your relationship team if you would like further information about employer and employee tax benefits of using a SIP.

As part of SAYE maturity planning, your Share Plan Manager will be able to discuss the processes we use to ensure participants can easily exercise their SAYE option as well as provide their instructions to keep, sell, gift or transfer shares to an ISA. They will also share information about EQ’s flexible ISA product.

With the majority of SAYE schemes maturing over the next year providing gains for participants*, there will be renewed focus on informative maturity communications as well as appropriate levels of financial education. EQ can support your communication campaign in many ways from detailed documentation, to webinars and in-person presentations.

_{*EQ analysis of 141 SAYE schemes maturing from 1 April 2023 to 1 March 2024 shows that 68% of schemes are currently ‘above water’ (potentially providing gains for participants). Based on recent share prices, the average gain for those schemes above water is 69%.}

Dividend Allowance

The 2018/2019 tax year saw a reduction in the annual dividend allowance from £5,000 to £2,000. From April 2023, the government will further reduce this to £1,000 and from April 2024 to £500, meaning more employees will need to arrange to pay tax on their dividends. 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).

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

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.

Treatment of SIP Dividend Shares:

For participants and “good” leavers (e.g. leaving the company due to injury, disability, redundancy, TUPE transfer, and retirement) there is no income tax payable on dividends reinvested within the SIP.

For participants leaving for a “bad” leaver reason (e.g. resignation, dismissal), Dividend Shares held for less than three years are taxed as a dividend in the year the Shares are withdrawn from the plan. If a participant's total dividends for the relevant tax year are above the dividend allowance, the excess is taxed at the prevailing dividend rate and the participant is responsible for telling HMRC.

National Insurance Contributions are not chargeable on Dividend Shares in any circumstances.

Key take-aways

• With the dividend allowance reduction to £1,000 from April 2023, and to £500 from April 2024 more employees may need to pay income tax on their dividend income.
• It’s a good time to consider the benefits of offering Dividend Shares within a SIP.
• Employees with tax to pay on dividends up to £10,000 can pay this through Self Assessment or by asking HMRC to change their tax code.

How EQ can help

Please contact your relationship team if you would like further information about SIP dividend reinvestment or if you would like to discuss whether compulsory reinvestment, or a choice of cash or reinvestment, should be a feature. An estimated 11% of SIP participants** receive dividends over £500 per annum. We can also provide support if you would like to undertake analysis to estimate dividend income for your current SIP participants.

To help with tax reporting, EQ issue SIP participants receiving cash dividends a Dividend Confirmation. In addition, leavers who have held Dividend Shares for less than three years are issued a statement showing the amount of dividend income that may be subject to tax.

All dividends received on shares held in an Individual Savings Account are tax free. We would like to see SIP dividends treated in a similar way, with no tax to pay on dividend income reinvested in the plan, even if the resulting Dividend Shares are held for less than three years. We will be preparing information about this for the call for evidence and will be interested in your thoughts. We estimate that 12% of participants*** reinvest over £500 of dividends over a three year period, potentially meaning dividend tax to pay if they become “bad leavers”.

_{**EQ analysis based on dividends paid on 487,481 SIP accounts over the period 6 April 2021 to 5 April 2022.
***EQ analysis based on dividends paid on 644,794 SIP accounts over the period 6 April 2019 to 5 April 2022.}

Health and Social Care Levy

In 2021, Boris Johnson announced plans for a new tax, the Health and Social Care Levy (Levy) based on National Insurance Contributions (NICs). In the 2022/23 tax year the Levy would be collected by increasing the current rates of NICs by 1.25% and in 2023/24 a formal legal surcharge of 1.25% would replace the increase in NIC rates.

In July 2022, the threshold at which workers start paying NICs was raised from £9,880 to £12,570.

In September 2022, Liz Truss announced the government would “reverse the National Insurance increase”, and that the Health and Social Care Levy Act 2021 would be repealed. The Health and Social Care Levy (Repeal) Bill 2022-23 received Royal Assent in October 2022 and the NIC reduction took effect from November 2022.

The government’s Autumn Statement in November 2022 confirmed that the Health and Social Care Levy was reversed.

SIPs

An employee participating in a SIP does not have to pay income tax and NICs on the value of the Free and Matching Shares awarded under the SIP nor on the pay that has been used to buy Partnership Shares. Although, there may be income tax and NICs due when the shares are removed from the plan depending on why the shares were removed and how long they were held in the plan.

SIP participant documentation, including terms and conditions, contains information about NICs, potential savings and example tables.

Key take-aways

• SIP participant documentation should be updated to remove any wording about the Levy, with income tax and NIC savings tables amended to use the current rates.

How EQ can help

Your Share Plan Manager will help with updating plan documentation.

Whilst the increase has been reversed, there continue to be valuable employee and employer NIC savings to be gained through using a SIP. We would be happy to share estimated savings based on adding various take-up and savings levels to our Employer NIC Savings modeller.

Please contact your relationship team if you would like further information about the benefits of using a SIP.

Employment Related Securities (ERS) End Of Year Tax Return

HMRC have provided an update about some minor changes to the ERS end of year return templates taking effect from 6 April 2023. These are:

• Mandatory completion of the ‘PAYE reference of the employing company’ field
• Mandatory completion of the ‘Is PAYE operated Y/N’ field
• Mandatory completion of the National Insurance number field and amendment to column title headings
• Change to the ERS end of year return templates column title heading to clarify that HMRC are asking for a HMRC valuation reference.

Alternative reference format for missing National Insurance number

In most cases, individuals included on an ERS end of year return should have a National Insurance number. However, there may be some exceptional circumstances where an individual needs to be included on a return but does not have a National Insurance number. In these circumstances, an alternative reference should be used only on the ERS end of year return. This reference is not a National Insurance number and should not be given to the individual or used in any other correspondence with HMRC. 

The alternative reference format will be:

• 9 characters ―  2 letters, 6 numbers and one letter
• TN ― indicates it’s an ERS reference and cannot be used for any other purpose
• Employee date of birth in format DDMMYY (e.g. 080403)
• No ‘National Insurance Number Reason Identifier’ (X, Y or Z) ― this is to identify the reason why an individual does not have a National Insurance number
  • X ― Under 16 years old
  • Y ― Applied for a National Insurance number and is waiting to receive it
  • Z ― Never paid National Insurance contributions as they have not been liable to UK National Insurance contributions.

As an example this could be TN080403Y.

The ERS end of year return template guidance and technical notes were published on 28 February 2023. The templates and submission checking service will be updated from 6 April 2023. 

Key take-aways

• These changes must be applied to ERS tax returns from 6 April 2023. The file checking service will identify errors in formatting and if there are any gaps in the mandatory data.
• Occasionally a share plan participant doesn’t have a National Insurance number and in these instances the above format should be used to create an alternative reference to be used in place of the National Insurance number on the ERS tax return.

How EQ can help

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. We will need to liaise with companies if there is any missing data.

SAYE (Sharesave) Bonus Rate Mechanism

HMRC have announced they are reviewing how to simplify the mechanism used to calculate SAYE bonus and interest rates. In their September 2022 ERS bulletin, HMRC advised that they were engaging with share plan industry experts to understand views on the ways that the mechanism could be simplified.

The next update will be provided sometime after the Spring Budget 2023. Based on having a notice period before changes become effective, it’s likely that the bonus mechanism and new SAYE savings prospectus will take effect in Q2, 2023.

One of the requirements of a tax advantaged SAYE option plan is a link to an approved savings arrangement. The terms and bonus rates to be applied to a specific SAYE scheme launch are set out in the savings prospectus provisions issued by HMRC. All approved savings carriers (the bank or building society) must use the prescribed prospectus, meaning all participants receive the same savings terms. It changes from time to time, with the prospectus effective on the date of an SAYE launch applying to contracts entered into for that invitation. There has previously been a minimum 15-day notice period for a new prospectus coming into effect.

SAYE scheme rules will often have a clause that allows an invitation within six weeks of a new prospectus coming into force.

Key take-aways

• If you are planning a SAYE invitation in Q2 2023, you should be aware that it is possible that a new savings prospectus will be announced around that time.
• If the SAYE invitation date and effective date of any new prospectus are close, both timetables and documentation should be kept under review.

How EQ can help

Changes to the bonus rate mechanism may result in a new prospectus and application of bonus/interest on new savings contracts. During the SAYE invitation planning we will discuss the current timeframes for these. We have a set of questions and answers about the impact of applying SAYE bonuses and interest which we can share and talk through with you.

Please contact your Share Plan Manager if you would like to discuss this further.

SAYE Deductions From Pay

SAYE contributions are normally through deductions from pay and HMRC have updated the list of exceptions in their Employee Tax Advantaged Share Scheme User Manual. An additional reason for allowing payments direct from participants has been added to the list: employee moves from a participating company to an associated company not in the UK.

Prior to this change, if an employee with a SAYE option moved to an associated company which was unable to operate UK SAYE processes, a request was made to HMRC to enable the employee to set up alternative payment arrangements (e.g. standing order or cheque payments). There is no longer a requirement to send this request to HMRC if the associated company is overseas.

Key take-aways

• This change will help simplify SAYE administration for companies offering SAYE where employees may transfer to an overseas associated company.

How EQ can help

Our SAYE administration processes have been updated and Contact Experience Centre Agents are aware of this change enabling alternative payment arrangements to be set up without referral.

There may still be other occasions when requests need to be referred to HMRC and we are happy to support and manage these going forward.

Please contact your Share Plan Manager if you would like to discuss this further.

CSOP Changes

In the government’s Spring Statement 2022 it was announced that its EMI review would be expanded to consider if CSOPs should be reformed to support companies as they grow beyond the scope of EMIs. In September 2022, the government announced two changes to CSOPs taking effect from 6 April 2023.

There is currently a requirement that any shares used in CSOPs must be in a share class that is: ‘worth having’, by either being

• ‘open market shares’ majority-held by outside investors or
• giving employees control of the company.

This rule will be removed, enabling more close alignment with the similar rules in Enterprise Management Incentives.

There is currently a maximum employee share option limit based on market value at grant of £30,000. This will be increased to £60,000 for any new options granted from 6 April 2023. Existing options are unaffected by this change.

Key take-aways

• Flexibility of share class requirements will mean more companies will be able to use CSOPs.
• Changes to the options limit and share class restrictions take effect automatically from 6 April 2023 and you do not need to revise existing scheme plans.
• Companies wishing to use a CSOP for the first time, or with expired rules may need a new set of scheme rules, which may need shareholder approval.

How EQ can help

EQ administer tax advantaged CSOPs for 19% of our discretionary clients, with about a half currently granting new options. All of these are linked to a non-tax advantaged discretionary scheme. Grants/awards are made to the limit, with any further amounts exceeding this granted as Nil-Cost Options/LTIPs or as an Unapproved CSOP. EQ can help with calculating the new limit ‘headroom’, appropriating the grant value between the CSOP and its linked plan.

Please contact your relationship team if you would like further information about the benefits of using a CSOP and how EQ can help you administer these plans.

EMI Option Agreements and Grant Process

In its Spring Statement 2022, the government concluded that following its review, the current EMI scheme remains effective and appropriately targeted. In its October bulletin, HMRC announced that it had provided updated guidance to clarify how the use of discretion clauses affect EMI options. At Spring Budget 2023, the government announced three changes to simplify the process to grant EMI options. Alongside introducing these changes to EMI, the government published its response to the earlier review.

Many EMI option agreements and other plan documents contain discretion clauses. Such clauses provide flexibility for the board of directors of a company to vary the terms of an agreement, after options have been granted.

Depending on the facts, an amendment to the terms of an EMI option agreement using these clauses might result in release and regrant of the option. This would mean that potential tax relief on gains accruing prior to the regrant is lost. It is also possible that a change in the terms would result in a breach of the conditions for tax advantaged treatment.

The updated guidance sets out the key principles, with examples, that HMRC will use when determining whether:

• the exercise of discretion will be allowable
• the exercise will lead to a release and regrant of a new option.

Grant process

To reduce administrative burdens, the government announced at Spring Budget 2023, the following changes to the process to grant options under an EMI scheme:

From 6 April 2023:

• The removal of the requirement for a signed working time declaration.
• The removal of the requirement to set out share restrictions in an option agreement.

From 6 April 2024:

• An extension of the time limit within which companies must submit an EMI notification.

Key take-aways

• Updated guidance from HMRC provides key principles for using discretion, though if there is any uncertainty, advice should be taken to ensure tax advantages are preserved.
• There are three changes to the grant process.

How EQ can help

Please contact your relationship team if you would like further information about the benefits of using an EMI and how EQ can help you administer these plans.