Autumn Budget 2024 - Employee Incentives

Speculation over changes to employer National Insurance contributions (NICs) has been rife in recent days, so it was no surprise when the Chancellor announced a 1.2 percentage point increase in the rate of employers NICs to 15% from next April.  The increased rate will also apply to class 1A NICs (payable on benefits in kind) and class 1B NICs (payable under PAYE settlement agreements). 

Perhaps more unexpected was the Chancellor's cut to the per-employee threshold at which employers start to pay NICs.  For some time, this has been lower than the starting point for employees, but the reduction from £9,100 to £5,000, will mean that some businesses will pay employer NICs in respect of a larger section of their workforce than before.  The new lower threshold will apply until 5 April 2028, after which it will be increased in line with the Consumer Price Index. To soften the blow for smaller businesses, the government announced that it would be increasing the £5,000 Employment Allowance to £10,500 from the next tax year and will remove the eligibility requirement for an employer NICs bill of below £100,000 in the previous tax year.  According to government figures, this measure will mean that 865,000 employers pay no NICs next year. 

It is worth noting that employer pension contributions are not subject to NICs, and the changes introduced by the Chancellor will increase the attraction of salary sacrifice arrangements for member contributions. 

Employers can use tax-advantaged share plans to incentivise and reward their employees in a way that does not attract tax or NICs.  In light of the Budget announcements, companies might think about introducing such plans or making greater use of those that they already have in place. 

Generally, employers are prohibited from transferring their NICs liability to employees.  One exception to this is on the exercise of options (as long as the option holder has agreed to it) and we might see more employers making use of this in future.  The employee can claim tax relief for any employer NIC they pay, so for an additional rate taxpayer, this gives an effective combined tax and NICs rate of 55.25% (previously it was 54.59%) on their option gain.  

The increase in capital gains tax rates (CGT) with effect from Budget Day from 10% and 20% to 18% and 24%, respectively, (see our Budget article on CGT), are of interest to participants in employee share plans looking to sell their shares.  Although we had hoped that any rise in tax rates would be accompanied by a corresponding increase in the annual exempt amount, the Budget documents state that it will remain at £3,000. 

Holders of awards as Enterprise Management Incentives (EMI) will be relieved to see that Business Asset Disposal Relief (BADR) has not been abolished as some feared it would be.  However, the 10% tax rate that BADR currently offers will change, increasing to 14% from next April and rising further to 18% for disposals made on or after 6 April 2026.

Loan to employees below the "official rate of interest" (currently 2.25%) give rise to a benefit in kind income tax and Class 1A NICs charge.  Since 2000, HMRC has committed to not making changes to the rate during the course of a tax year.  The government has announced that this practice will change, and from 6 April 2025, the official rate of interest will be reviewed quarterly which means that it could fluctuate during a tax year.  Employers that provide their staff with low interest loans will need to be ready for any changes and prepared for the impact this will have on their Class 1A NICs liability and reporting obligations.

Share Incentive Plans are a form of tax-advantaged all-employee share ownership plan under which participants can receive share-related benefits, including the ability to purchase shares using deductions from their salary.  Participants must be given a statutory notice to explain the impact that deductions from salary may have on certain benefits.  The Neonatal Care (Leave and Pay) Act 2023 gives parents whose babies require specialist care after birth the chance to take additional paid time off work.   As a result, the statutory notice issued under a SIP must include a reference to Statutory Neonatal Care Pay in the list of payments that can be affected by deductions from salary.   This measure takes effect from the date on which the Finance Bill receives Royal Assent. If you operate a SIP, we recommend that you discuss the change with your share plan trustees and administrators.

An EOT is a type of employee benefit trust set up to acquire a controlling interest in a company.  EOTs benefit from tax incentives which are aimed at encouraging business owners to transition their companies in a way that can reward employees and encourage employee engagement.  Transfers of property to EBTs operated by close companies can give rise to inheritance tax charges.   There are exemptions from these charges provided certain conditions are met. Amid concerns that these exemptions and reliefs for EOTs and EBTs were not being used as intended, a consultation was launched in 2023 with proposals for reform.  These changes will now take effect from Budget Day. 

Currently, rather than reporting benefits in kind on form P11D at the end of the tax year, employers can choose to account for tax in real time through the payroll.   At the start of this year, as part of a simplification update, the previous government announced its intention to make payrolling of benefits in kind mandatory.  The Chancellor has confirmed that the Labour government will take this measure forward and has stated that it will be mandatory to report and pay income tax and Class 1A NICs on most benefits in kind through payroll from April 2026.  Payrolling for employment-related loans and accommodation will be introduced on a voluntary basis from April 2026 and the government will set out the next steps on when they will become mandatory. 

Umbrella companies employ individuals that work for end clients and agencies.  The previous government noted the important role that umbrella companies play in the labour market but also acknowledged that some of them were being used to facilitate tax avoidance and even fraud.  It consulted on ways to combat non-compliance by umbrella companies setting out a number of different proposals.  In the Budget, the government announced that it will introduce legislation to make the agency that supplies the worker to the end client legally responsible for operating PAYE on the worker’s pay and liable for any shortfall.  This is similar to the rules that have applied to agency workers for some time.  An important point for end clients to note is that, if there is no agency involved in the supply of the umbrella company worker, they could find themselves responsible for the tax and NICs due. This measure will be introduced in April 2026 and the government will give those affected the opportunity to provide feedback on its proposals.