Incentives and Remuneration: Winter update

With the Budget set for 6 March and a general election on the horizon, it is difficult to predict what will happen to tax and National Insurance contributions (NICs) in the coming months. There are, however, some changes that have already been announced or put into effect by the current Government.

National Insurance Contributions cut for workers (but not employers..)

The cut in employee NICs announced in the Autumn Statement took effect from 6 January.  Employees now pay NICs at the rate of 10% on monthly earnings between £1,048 and £4,189 (£12,570 and £50,270 per year). The "blended" rate for directors (who pay NICs by reference to their annual earnings) for 2023/24 is 11.5%. The rate of employer NICs on earnings above £758 per month (£9,100 per year) is unchanged at 13.8%. It is important to remember there are very few circumstances in which employer NICs can be passed to the employee although one of these is on the exercise of options (with the employee's agreement).  

The main rate of self-employed Class 4 NICs, charged on annual profits between £12,750 and £50,270, will be cut from 9% to 8% - this time with effect from 6 April 2024. Self-employed Class 2 NICs, which are charged at £3.45 per week, will effectively be abolished from that date as self-employed individuals with profits above the £12,570 threshold will no longer be required to pay them but will continue to receive access to contributory benefits (including the State Pension). Those individuals who were paying Class 2 NICs voluntarily, including people who moved abroad, will continue to be able to do so to preserve their entitlement to such benefits.

Capital Gains Tax annual exemption to halve (again)

The annual gain a person can make before paying capital gains tax (CGT) fell from £12,300 to £6,000 last April.  On 6 April 2024 it will be halved again to £3,000 which is unwelcome news for participants in both tax-advantaged and non tax-advantaged share plans that benefit from capital gains treatment. This is because many of them have been able to use the historically larger allowance against gains realised when they sell their shares to make participation in the plan effectively tax-free. Participants can still do this, but to a much more limited extent. Because of this reduction, a greater number of participants may (if the plan rules allow) look to transfer their shares to a spouse or civil partner first, to take advantage of double the allowance.

If you are a business that operates a tax-advantaged Company Share Option Plan, Share Incentive Plan, Save-As-You-Earn Plan and/or an Enterprise Management Incentive plan or non tax- advantaged share ownership plan that benefits from capital gains tax treatment, you or your share plan provider may wish to remind participants of the reduction in the capital gains tax annual exemption.  In each case, care must be taken not to give participants personal tax advice.

EMI notification period extended

EMI options are a very valuable form of share incentive arrangement for those companies able to grant them.  Currently, one of the important conditions for an option to qualify for EMI treatment is that it is notified to HMRC within 92 days of grant. This is different to all the other forms of tax-advantaged share plan (and non tax-advantaged incentives) where awards and options are reported to HMRC at the end of the tax year. 

To bring EMI in line with other share plans, legislation is making its way through Parliament to give companies until 6 July following the end of the tax year of grant to report EMI options.  However, it's important to note that this will only apply to options granted on or after 6 April 2024, so until then, EMI options must be notified within 92 days of grant.  HMRC have not yet confirmed whether the notification will be by way of a separate online form or as part of the annual return.  Given the tax advantages at stake, even when the longer deadline comes into effect, we would recommend that companies continue to notify HMRC of EMI options as soon as possible after grant.

It is worth noting that the HMRC guidance for all share plans has been updated recently to stress that before submitting a share plan notification or return, you should save a copy of it for your own records (for example, through taking screen shots).  This is because the online service will not save the details and you will not be able to access them again.

New bonus rates for Save-As-You-Earn (SAYE)

SAYE plans are a form of tax-advantaged, all-employee share option scheme under which participants can exercise their options using the proceeds of a savings contract lasting three or five years. At the end of the savings period, the savings contract can have a tax free "bonus" added to it. If an individual chooses to withdraw their savings early, they won't be eligible for a bonus but may be entitled to receive tax free interest.

The bonus and interest rates are fixed by HMRC using a set mechanism and remain the same throughout the life of the relevant savings contract. For nearly a decade, this mechanism has meant that no bonus was payable on SAYE savings contracts. Earlier last year, HMRC announced the introduction of a new automatic mechanism for calculating SAYE bonus and interest rates which came into effect on 18 August. Under this mechanism, the bonus and interest rates are calculated by reference to the Bank of England Bank Rate (also known as the ‘base rate’). For SAYE invitations issued on or after 18 August, the bonus rates (expressed as a multiple of monthly savings) are 1.1 for a 3-year savings contract and 3.2 for a 5-year contract with the early leaver rate set at 1.42%. HMRC have said they will not formally announce future changes but will record the bonus rates, early leaver rate and effective date of any change at the following link:

Bank of England bank rates for Save-As-You-Earn (SAYE) Share Option Schemes

Review of SAYE and Share Incentive Plans (SIP)

Over the summer, the UK Government launched a Call for Evidence on the two tax-advantaged all-employee plans, SAYE and SIP, to consider opportunities to simplify and improve the schemes. Changes that the Government has been asked to consider include increasing the financial limits on individual participation and reducing the vesting/holding periods for tax relief to be available.  Other enhancements that have been requested include more flexibility for leavers (such as allowing them to keep their shares within a SIP or to continue to save under their SAYE plans) and improving the position for companies that are subject to a takeover or internal reorganisation.  The reduction in the CGT annual allowance (down to £3,000 from 6 April) will have an impact on participants in SIP and SAYE and the Government has been asked to consider keeping some form of CGT relief for these plans.  We look forward to the Government's response to the Call for Evidence and hope that it will lead to changes to these important incentive arrangements.

Cases on the tax treatment of share options are rare and so those with an interest in the subject eagerly anticipated the Supreme Court's decision in Vermilion Holdings (handed down at the end of October).  The significance of this judgement lies in its analysis of when options provided by a person's employer will be deemed to be by reason of employment and therefore within the charge to income tax (and potentially also NICs).  Although the facts of this case concerned a share option, a similar deeming provision can be found in the definition of employment-related securities (which extends to shares and units in a collective investment scheme). The potential reach of the Vermillion decision is therefore wide and is being carefully considered.

Changes to the Off-Payroll Working Rules

Credit for tax already paid

The "off-payroll working" rules were introduced (initially in 2017 for the public sector then extended more widely in 2021) amid growing concerns that certain individuals were working like employees or directors but were not being taxed as such. The rules focus on arrangements where individuals provide services to end clients through "intermediaries" such as their own personal service companies (PSCs).

Broadly the rules apply where, if you assumed that the individual was engaged directly by the end client rather than through their PSC, the individual would be regarded as an employee or office holder of the end client. The end client is responsible for assessing whether the rules apply and, if so, it is then required to account for income tax and NICs as if it were paying salary. 

Until now, where an end client incorrectly treated an engagement as outside the rules, it would not receive any credit for tax paid by the PSC or the worker when calculating its own tax liability.  This has been seen as unfair because had the end client correctly applied the rules in the first instance, it would have deducted income tax and NICs from the fee that it paid to the PSC (assuming that it was contractually allowed to do so).  This position is being changed by legislation within the current Finance Bill.  This will amend the rules so that, if the end client made a mistake and determined that it should not account for income tax and NICs, any income tax and corporation tax that has been paid by the individual and/or their PSC in connection with the engagement can be set-off against the end client's liability. The changes will require further PAYE regulations to be made but will apply retrospectively to open compliance cases from when the rules were introduced in April 2017.

Updated guidance and continued emphasis on compliance

HMRC is keen to ensure that clients engaging workers through intermediaries are aware of their obligations and comply with the off-payroll working rules.  New guidance (GfC4) has been published which sets out best practice and examples of good systems and processes.   End clients that engage workers through PSCs should read this guidance to reduce the risks of errors when applying the rules.  Last autumn, HMRC launched a new version of its online checking tool for employment status (CEST).  This new version is being introduced in stages, with phase 1 making CEST more user friendly by switching to a new operating platform and adding links to HMRC guidance.  We must wait for the second phase of CEST 2.0 to see whether any substantive changes will be made. 

Recent caselaw

Employment status cases regularly make the headlines and 2023 was no exception.  Well-known broadcaster, Kaye Adams, finally won her long standing dispute with HMRC successfully arguing that IR35 did not apply to her PSC's contracts with the BBC.  On the other hand, HMRC successfully argued that IR35 applied to the activities of the PSC operated by household name, Eamonn Holmes.   These decisions show how fact-specific status determination is, making the rules difficult to apply with certainty.  Although many of the cases in the public eye relate to IR35 (where liability for paying tax and NICs under the rules generally sits with the PSC), they are relevant to the application of the off-payroll working rules where liability for tax and NICs can rest with the end-client.

Aside from IR35 and the off-payroll working rules, we await with interest the Supreme Court's decision on whether certain part-time football referees are considered to be employees (for tax purposes) of the non-profit company that provides them.  In a non-tax case, the Supreme Court confirmed last year that Deliveroo drivers are self-employed (and not entitled to trade union recognition) largely due to the existence of a very wide substitution clause in their contracts.  Cases such as these have relevance as the tests for determining status for employment rights and tax purposes are similar.

Umbrella companies in your supply chain? New obligations could be on the horizon

Umbrella companies are a form of intermediary through which workers can provide their services to end clients without becoming their employees. Instead, the umbrella company employs the temporary worker and is responsible for deducting income tax and NICs as well as providing holiday pay, statutory sick pay and pension auto-enrolment. 

The introduction of the off-payroll working rules in 2017 is one factor that has led to an increase in the use of umbrella companies and the Government recognises that umbrella companies have a role to play in a flexible and dynamic labour market. However, umbrellas are not currently regulated and the Government is aware of some areas where they have been used to avoid tax and employment law obligations. 

Last summer, the Government published a consultation paper on tackling non-compliance in the umbrella company market.  As well as proposals to regulate umbrella companies, the Government is considering options to deal with tax non-compliance in this area. These include (i) making it mandatory for end clients to carry out due diligence when they source workers with penalties for those failing to do so and (ii) transferring the tax debt of another business (income tax and NICs but possibly also VAT) to another party within the supply chain, including the end client. 

If you are a business that engages workers through intermediaries, it is important to be aware of these potential changes and ensure that your systems and processes (including indemnities within contracts) will be ready to deal with whatever proposals are taken forward.  

Revised UK Corporate Governance Code published

All companies with a premium listing on the Official List are required to explain how they have applied the UK Corporate Governance Code (the Code) in their annual financial reports.  The Code sets out corporate governance recommendations, including in relation to remuneration, and the current version was last reviewed in 2018.  In the summer of 2023, the Financial Reporting Council published a consultation on its proposals to revise the Code which included greater transparency on malus and clawback arrangements in directors' remuneration. The final revised code was published on 22 January 2024 and will (for the most part) apply to accounting years starting on or after 1 January 2025. Companies will be required to state in their remuneration reports whether they have malus and clawback arrangements in place and the situations in which they could be used. They will also have to give a description of the period for malus and clawback and explain why this period is best suited to the company.  Finally, they will need to state whether the provisions were used in the last reporting period and, if so, give a clear explanation of the reason. 

Reforms to the UK Listing Regime

Just before Christmas, the Financial Conduct Authority (FCA) published a consultation paper seeking views on its proposal for encouraging more companies to list in the UK by merging its existing "standard" and "premium" categories.  The FCA proposes replacing these with a single category for "equity shares in commercial companies".  For premium listed companies, this represents a relaxation of the current rules however it is a step-up in regime for those that are standard listed.  It seems, however, that the requirement to seek shareholder approval prior to the introduction and amendment of certain employee share schemes and long-term incentive plans currently applicable to premium listed companies will also apply to the new category. 

For further details of the FCA's proposals, as well as the wider package of reforms, please read the following briefing note by our colleagues in the Travers Smith Corporate team:

UK capital markets regulatory reforms - London calling| Travers Smith

Revised QCA Corporate Governance Code

Companies that apply the Quoted Companies Alliance (QCA) Corporate Governance Code (for example those with shares traded on AIM) will need to be aware of the revised version of the code that was published last November and takes effect for financial years starting on or after 1 April 2024.  This was the code's first review since 2018 and is comprehensive although several of the new provisions were already set out in the QCA's other publications (such as the guide for remuneration committees).  From an incentives perspective, of note is new Principle 9 that reflects the QCA's existing guidance on remuneration by requiring companies to establish an effective remuneration policy for management.  Unlike their fully listed counterparts, AIM companies are not required by law to put their remuneration policy to a binding shareholder vote.  The QCA's current guidance is that the remuneration policy should be put to an advisory vote and this is now set out in the new code.  The code goes on to note that larger companies might want to follow best practice and put their policy to a binding vote. For more information on the revised QCA code, please see the article below by our corporate colleagues:

QCA Publishes Revised Corporate Governance Code | Travers Smith

Intermittent Trading Venues (ITVs)

In his 2023 Mansion House speech, the Chancellor of the Exchequer announced proposals for the introduction of a new platform to facilitate the sale of shares in private companies by auction on an intermittent basis.  The first of these "Intermittent Trading Venues" (ITVs) is expected to be launched by the London Stock Exchange Group by the end of 2024.  It should be noted that these ITVs can only be used to sell existing shares and will therefore be a way of providing liquidity for shareholders (such as employees) rather than raising funds.  It will be interesting to see which companies choose to make use of this new platform.  

Proxy voting services publish policy updates

At the end of 2023, both Glass Lewis and the Institutional Shareholder Services (ISS) published their voting policy guidelines for 2024.  The Glass Lewis proxy voting guidelines include new provisions  on combined incentives plans, its views on linking pay to environmental and social criteria and the use of remuneration committee discretion.  At the time of writing, the Investment Association is yet to publish its updated Principles of Remuneration for 2024 but these are expected shortly. 

Restrictions on non-compete clauses

To protect a company's business interests when employees leave, service agreements often contain restrictions on the ex-employee's activities for a period of time following their departure.  These are known as "restrictive covenants" and a commonly used example of this is one that prevents an ex-employee from joining a competitor or setting up a rival business (known as a "non-compete" clause).  Under existing case law, all restrictive covenants must be limited in scope and cannot extend further than is reasonably necessary to protect the employer's legitimate business interests.  However, to help promote greater mobility and to encourage innovation within the UK workforce, in spring 2023, the Government announced plans to introduce legislation that will limit the length of non-compete clauses to three months.  The Government has said that the limit will only apply to employment and worker contracts so it seems that incentive plans will be able to contain provisions discouraging competition for longer than three months.  For example, the terms of an award could provide that it will lapse or be subject to clawback if the ex-employee competes with the company within a period of time.  The Government has said that the legislation to implement the change will be introduced "when Parliamentary time allows" but has not published any drafting yet and it remains to be seen whether this can be done before the next general election.  However, employers might want to think about how they can use their incentive arrangements to protect their interests going forward. Note there are no plans to limit other forms of restrictive covenant such as non-solicitation or non-dealing clauses although these will continue to be subject to the legal principles described above as will any non-compete clauses in incentive arrangements. 

TUPE and employee share schemes: an update

When the business an employee works for is sold and the Transfer of Undertaking (Protection of Employment) regulations apply (TUPE), working out which of the employees' rights transfer can be tricky.  In the recent case of Ponticelli Ltd v Gallagher, the Inner House of the Court of Session held that an individual's right to participate in their employer's Share Incentive Plan transferred with them.

Travers Smith Incentives and Remuneration partner, Mahesh Varia, co-authored an article with Sam Whitaker of Debevoise & Plimpton in the November issue of ELA Briefing examining what impact this will have going forward. A copy of the article is available at the link below:

TUPE and employee share schemes: an update in light of Ponticelli | Travers Smith

Global mobility

The trend for remote and agile working was accelerated by the Covid19 pandemic and has since become established; we expect this to continue in 2024.  While this widens the talent pool for businesses, it presents challenges in terms of immigration, employment law, tax and social security issues.  The Travers Smith Incentives and Remuneration team can help employers navigate these complex issues.  For an overview of the key considerations, please read the Solicitors Journal article authored by Travers Smith Incentives and Remuneration Senior Counsel, Elissavet Grout, and tax partner, Hannah Manning which can be accessed using the link below:

Global Mobility - It's a small world after all

For more information on Global Mobility, please visit the dedicated section of our website:

Global Mobility | Travers Smith

Digital nomads

One of the global mobility trends we are anticipating for 2024 is the increased use of digital nomad visas.  These are being offered by some jurisdictions around the globe (including many European countries such as Spain, Portugal and Greece) to encourage individuals to come and live in their country for a short to medium period of time, provided their employment can be undertaken remotely and their employer continues to be based overseas. Some commentators have suggested that these may even match or overtake the more traditional company sponsored visas.  The UK does not currently offer digital nomad visas and we are not aware of any proposals to introduce them.  Under current UK immigration rules, remote working cannot be the sole or main purpose of a visit to the UK.

Whilst being a digital nomad can be very attractive to employees in terms of lifestyle, the question of how they are taxed both for income and corporation tax purposes and which social security charges they should pay can be complex.  The Travers Smith Incentives team can help you navigate your way through these issues.

New social security agreements

Where workers move around, they can find themselves paying social security in more than one country.  The UK has entered into a series of social security agreements with other countries in part to ensure that such workers are only subject to the social security regime of a single state at any one time. 

Before Brexit, the UK applied the rules for social security contributions that were set out in EU regulations.  Certain other non-EU countries (Iceland, Liechtenstein, Norway and Switzerland) also apply these rules.  When the UK left the EU, it entered into a protocol on social security with EU members but had to adopt new social security agreements with Iceland, Liechtenstein, Norway and Switzerland.   

On 1 January 2024, a new social security convention between the UK, Iceland, Liechtenstein and Norway came into force. The Social Security Convention between the UK and Switzerland has provisionally applied since November 2021 but only fully came into force on 1 October 2023.   

These agreements largely replicate the detached worker and multistate worker provisions that were a feature of the EU rules before them, as well as giving scope for the competent bodies of the relevant states to agree on exceptions to the general rules. This "exceptional circumstances" provision is a feature of the EU regulations but does not form part of the UK/EU protocol.

How to apply for a certificate of coverage

Employees planning to work abroad will seek confirmation from HMRC that they will remain within UK social security net under the terms of a reciprocal agreement by applying for a certificate of coverage.  The application can be made by the individual or (if they are an employee) by their employer. To make an online application you will need a Government Gateway user ID and password.  HMRC has updated its guidance adding a new section on how to check when you can expect a reply from HMRC.  Historically, HMRC response times have been slow, leading to frustration in the business community.  Having gone fully digital, it is now hoped that the turn-around times will start to improve.