Incentives and Remuneration: Winter Update

2025 – Challenges and Opportunities

Welcome to our Winter Update in which we look at the challenges and opportunities that lie ahead in the broad field of Incentives and Remuneration. In terms of opportunities, it is worth remembering that the UK ranks consistently highly when its share plans are compared with those of other countries, including ahead of the US, France, and Germany. In other recent good news, according to PWC’s annual CEO survey, the UK has also risen to become the second-most attractive global destination for international investment, after the US. Against this backdrop and given that employment costs are expected to rise this year, now is the right time to revisit tax-advantaged plans or develop bespoke arrangements that both incentivise the workforce and generate growth. If you would like to discuss any of the matters covered in our update, the Travers team would love to hear from you. Our contact details can be found at the end of this update.

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Preparing for the employer’s NICs increase

The announcement in last October’s budget of a 15% employer’s Class 1 (and Class 1A and 1B) National Insurance contributions (NICs) rate with effect from 6 April 2025 (rising from 13.8%) did not come as a huge surprise, but perhaps more unexpected is the cut to the threshold at which employers start to pay NICs per employee. This will be reduced from £9,100 to £5,000 with effect from 6 April 2025 and means that some businesses will pay employer’s NICs in respect of a larger section of their workforce. The Apprenticeship Levy (for annual wage bills in excess of £3,000,000) remains unchanged at 0.5%.

Against this backdrop, we discuss below how certain employee incentive structures can be used to reduce exposure to the employer’s NICs rise:

Make the most of tax-advantaged share plans – If you have tax-advantaged share plans or are considering adopting a new share plan, then it is worth looking to see whether you are making full use of the tax and NICs savings they can offer. There are four tax-advantaged share plans in the UK, and provided certain qualifying conditions are met, they can be offered over both UK and non-UK shares.
Two of these, Save As You Earn (SAYE) and Share Incentive Plans (SIP), must be operated on an all-employee basis. Most listed companies will have one (or sometimes both) of these arrangements in place, but they may not be fully utilising the benefits. For example, under a SIP, free shares with a value of up to £3,600 per annum can be gifted to employees completely free of income tax and employee and employer's NICs. If employees remain in the business and their shares are held in the SIP for a minimum of 5 years, they can then be sold completely tax, NICs and capital gains tax free.
Awards under Company Share Option Plans (CSOP) and Enterprise Management Incentive (EMI) plans can be made on a selective basis. If you haven’t used your CSOP for a while, it is worth noting that the limit on the value of shares that an individual can hold as tax-advantaged options under the plan is £60,000 (increased from £30,000 back in 2023) and there is no overall limit. For EMI plans, the limits have remained, for several years now, at £250,000 per employee and £3,000,000 overall.
Employer’s NICs on option gains can be transferred to participants – There is a general prohibition on the recovery of employer’s NICs costs from employees’ remuneration; however, one exception to this rule is on the exercise of non tax-advantaged share options. Employers who operate non tax-advantaged share option plans (for example, Long Term Incentive Plans (LTIPs)) may want to share the burden of the increased employer NICs by passing on the difference between the old 13.8% rate and the new 15% rate to employees. The downside for participants is that it increases their overall tax and NICs cost, but the employee is able to claim tax relief for any employer’s NICs they pay. It is important to note that the cost of the Apprenticeship Levy cannot be passed on to employees and the employee has to agree to bear the employer’s NICs under the terms and conditions of the option.
Employer’s NICs can be taken into account when designing and implementing cash bonus plans – Employer’s NICs cannot be deducted from an employee’s cash bonus, but the calculations and decisions taken when determining the amount of bonus to be paid to an employee can be revisited and, if commercially desirable, updated to take account of the increased employer NICs cost (for example, by reducing the maximum bonus pool available for payment). Depending on the nature of the arrangement, it may not be possible to apply these changes retrospectively, so it is important to act now for the upcoming bonus year.
Consider bonus deferral into share options – If done correctly, and subject to the terms and conditions of the bonus, a cash bonus deferred into share options can be a tax-neutral event. When the share options are subsequently exercised, all or some of the employer’s NICs cost can be passed on to the employee (as described earlier in this update). While executive directors in listed companies are familiar with this type of bonus deferral (for corporate governance reasons), historically, deferral has not been a particularly popular incentivisation strategy. It remains to be seen if this will change.
Consider non tax-advantaged share ownership plans – Share incentives where the growth in value is taxed as capital gain rather than income tax have the added advantage of not giving rise to employer’s NICs liabilities on that increase. Even if you are not able to offer one of the four tax-advantaged share plans, you might be able to operate a share ownership plan where participants buy shares at their current market value (or pay income tax and NICs on any discount) on the basis that when they sell their shares, they will not trigger further income tax and NICs charges. Growth share plans and/or joint share ownership plans (JSOPs) can be a means of making share ownership affordable as they entitle participants to benefit from some of the growth in value of the share (or interest in a share) above a pre-determined threshold.
Use salary sacrifice arrangements – Employer pension contributions are not subject to NICs and the rise in NICs rates announced by the Chancellor will increase the attraction of salary sacrifice arrangements for member contributions. Salary sacrifice arrangements can also be used for the provision of cycles and cyclists’ safety equipment under cycle-to-work schemes. Anti-avoidance rules operate to restrict the use of salary sacrifice arrangements in conjunction with the operation of most other benefits.
Changes to the Employment Allowance – Eligible employers can use the Employment Allowance to reduce their employer’s NICs bill. From 6 April, not only will the allowance increase from £5,000 to £10,500, but the existing eligibility requirement for an employer’s NICs bill of below £100,000 in the previous tax year will be removed, making it more widely available.

Capital gains tax – rates increased but still below income tax levels

As predicted, the last October’s budget included increases to the rates of capital gains tax (CGT) from 10% (for basic rate taxpayers) and 20% (for higher rate taxpayers) to 18% and 24% respectively. These changes took effect from 30 October 2024 (Budget Day). The annual CGT exempt amount remains at the low level of £3,000 (reduced from £6,000 last April).

Even given these changes…

The CGT rates are still lower than the top rates for income tax (40% and 45% for higher and additional rate taxpayers respectively).
National Insurance contributions and Apprenticeship Levy are generally not triggered when an incentive benefits from capital treatment.
Business asset disposal relief (BADR) was not abolished as some feared it would be. This will be a relief to participants in EMI plans that are able to take advantage of the 10% rate tax that BADR currently offers (it will increase to 14% from this April and rise further to 18% for disposals made on or after 6 April 2026).
Cash flow advantages can be gained from CGT treatment as, unlike income tax and NICs charges payable via PAYE, individuals generally don’t have to pay capital gains tax until they actually sell their shares (and therefore have the funds to pay the tax due) and don’t account for it immediately but through self-assessment.

What’s new with tax-advantaged share plans?

Annual returns – it’s never too early to start preparing!

The deadline for registering and sending returns in respect of share plans operated in the current tax year might be some way off (July 6), but it is always a good idea to prepare early and make sure you have all the information you need when the time comes. If you granted EMI options in the 2024/25 tax year, it’s worth remembering that the deadline for notifying HMRC has been brought in line with other share plans to July 6 (previously you had to notify HMRC within 92 days of grant).

The HMRC guidance for all share plans stresses that before submitting a share plan notification or return, you should save a copy of it for your own records (for example, by taking screen shots). This is because the online service will not save the details and you will not be able to access them again. We will be sending out a reminder of the registration and annual return process following the end of the tax year but in the meantime, guidance can be found on the government website.

SAYE – income tax can be collected under PAYE without HMRC authorisation

Like all tax-advantaged plans, there are certain circumstances in which the exercise of an SAYE share option will give rise to an income tax charge. The most common situation where this can arise is on a change of control that isn’t eligible for tax relief; however, unlike other plans, the tax is payable by individuals under self-assessment rather than collected by employers through the PAYE system. If option holders aren’t required to file self-assessment returns for any other reason, this can create an administrative burden for them. As a concession, HMRC have in the past allowed companies to apply for authorisation to collect the tax through PAYE provided a full schedule of those choosing to have income tax deducted through payroll is sent to HMRC. To ease the administrative burden, last year, HMRC removed the need for its authorisation to operate PAYE on SAYE option gains (although it must still be voluntary on the part of the option holder) and there is no longer a requirement to provide a schedule of participants.

The revised guidance can be found on the government website.

EMI – new guidance on independence and impact of carer’s leave on the working time requirement

HMRC has published revised guidance on the situations in which a company will be considered “independent” for the purposes of EMI. This is important because only the shares of a company that is independent can be used for the grant of tax-advantaged EMI awards. The test is wide as a company will fail the independence test not only if it is under the control of another company at the time of grant but also if there are “arrangements” in place for it to come under such control. For this purpose, arrangements can include where corporate investors have casting votes or swamping rights in certain circumstances unless this is in the event of genuine financial distress. Care needs to be taken when granting EMI options close to a sale of the company as a mutual understanding between all the parties (which must include the purchaser) to a potential sale could amount to an arrangement for a loss of control causing the independence test to be failed. HMRC accept that a genuine requirement for external approval that is outside the control of the parties before the transaction can go ahead may not amount to an “arrangement” until the approval is given (or it is clear it will be given). A link to the revised guidance can be found the government website.

Employees are only eligible to receive EMI awards if they meet what is known as the “working time” requirement. In summary, they must work for the EMI company (or a member of the group) for at least 25 hours a week or, if less, 75% of their working time. In calculating “working time,” you include time that an employee would have been working but for certain specified reasons including injury, ill-health, disability, pregnancy, childbirth, and parental leave. Now that legislation has come into force giving employees the right to a certain amount of unpaid time off to help a dependent with long-term care, working time also now includes carer’s leave.

SIP – notification on salary deductions must include statutory neonatal care pay

Participants in a SIP acquiring partnership shares through salary deductions must be given a statutory notice to explain the impact that such deductions 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. For partnership share agreements issued from 6 April 2025, the relevant notice must include a reference to Statutory Neonatal Care Pay. If you operate a SIP, we recommend that you discuss the change with your share plan trustees and administrators.

HMRC continues to focus on employment status

Off-Payroll Working Rules/IR35

2024 saw more successes for HMRC in IR35 litigation winning appeals in the Upper Tier Tribunal in respect of the personal service companies (PSCs) of well-known presenters, Adrian Chiles and Stuart Barnes. Although not an outright win for HMRC in the case of Mr Chiles’ PSC (the case was referred back to the First Tier Tribunal for it to reconsider), the Upper Tier Tribunal found that IR35 applied to Mr Barnes’ PSC. 2024 also saw publication of the long-awaited Supreme Court decision on whether certain part-time football referees are employees (for tax purposes) of the non-profit company that provides them. Unfortunately, this is another situation where the case was referred back to the First Tier Tribunal for it to reconsider, taking into account the findings of the Supreme Court. Earlier this month, the First Tier Tribunal found that certain payments made to the PSC of former Manchester United footballer, Bryan Robson, in respect of his duties as ambassador to the club fell, on balance, within IR35.

Although these cases do not directly relate to the off-payroll rules (under which tax liabilities can fall on the end client), the principles to be applied are the same and they demonstrate how fact-specific (and difficult) status determination decisions can be. They also go to show that HMRC will pursue status cases, and we understand that HMRC has been increasing its compliance activity in this area. If you engage workers through intermediaries such as PSCs, it is important to refresh your assessment of their status under the rules from time to time and ensure that your processes and procedures are still appropriate and understood by those responsible for operating them. HMRC has consolidated its guidance on worker status, please also see our briefing note on what you have to do if you are within the off-payroll working rules.

New obligations for those hiring workers through umbrella companies

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 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 and in the autumn budget, the new government announced that it would 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.

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.

Corporate governance, what listed companies should be aware of

2024 was an important year for regulatory and corporate governance changes many of which are designed to increase the UK’s appeal as a place to do business.

UK Corporate Governance Code

A new UK Corporate Governance Code was introduced in 2024 which applies (in most part) to accounting years starting on or after 1 January 2025. All companies listed 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 previous version was last reviewed in 2018. Although the new Code does not contain fundamental changes as far as employee incentives are concerned, 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 is best suited to the company. Finally, they will need to state whether the malus and clawback provisions were used in the last reporting period and, if so, give a clear explanation of the reason. Given the timing of the change, it’s worth noting that most of the annual reports put to shareholders during the 2024 AGM season will still be based on the 2018 Code.

UK Listing Regime

The rules for the long-awaited UK Listing Regime reforms came into effect on 29 July 2024. Although most of the changes don’t have a direct effect on employee incentives, there is an impact on all companies listed on the Official List due to changes in terminology and numbering. Of particular note is the replacement of premium and standard listing categories with a single segment called the equity shares (commercial companies) category. The changes represent a relaxation of the rules for companies that had a premium listing but are a step-up in regime for those that were standard listed. However, the previous requirement for premium listed companies to seek shareholder approval prior to the introduction and amendment of certain employee share schemes and long-term incentive plans continues to apply to the new category. Listed companies need to ensure that documentation referring to the Listing Rules now reflect the single listing category and up-to-date references.

QCA Corporate Governance Code

Companies that apply the Quoted Companies Alliance (QCA) Corporate Governance Code (for example those with shares traded on AIM) will be aware that the revised version of the Code took effect for financial years starting on or after 1 April 2024 (subject to a 12-month transitional period for companies to adjust to the new code). From an incentives perspective, one of the most important changes is the new code requirement (it previously formed part of QCA guidance) for companies to establish an effective remuneration policy for management. In contrast to their listed counterparts, AIM companies are not required by law to put their remuneration policy to a binding shareholder vote but the new code states that the remuneration policy (as well as the remuneration report) should be put to an advisory vote. The revised QCA Code goes on to say that larger companies might want to follow best practice and put their policy to a binding shareholder vote.

Institutional investor representative committee and proxy voting service guidelines - setting a new tone

Winter is the time when institutional investor protection committees and proxy voting services update their guidelines for the forthcoming AGM season. In recent years, the guidelines have altered comparatively little but towards the end of 2024, we saw a marked change in tone. This was particularly noticeable when the Investment Association (IA) published their eagerly anticipated remuneration guidelines last October. We were expecting a comprehensive re-write given that the IA had not updated their guidelines for the 2024 AGM season but had instead written to the chairs of FTSE350 remuneration committees emphasising that their principles are guidance, not rules, and recognising the need to support a competitive market but at the same time deliver value to shareholders.

When the revised principles were published in the autumn, although they were fundamentally unchanged, there was a noticeable shift in tone with emphasis on shareholder engagement and the need to do what best fits with the company’s strategy. The guidance is also more concise and clearly set out than previously with new guidance on what are known as “hybrid” plans. These are long-term incentive plans under which a combination of awards can be granted, with or without performance conditions, which some companies, particularly those with a US presence, have introduced. Another noticeable change is the removal of the dilution limit requiring no more than 5% of a company’s share capital to be issued under executive (discretionary) share plans in any ten-year period. The 10% in ten-year dilution limit for all-employee plans remains although the guidance recognises that in high-growth, newly listed companies, there may be a case to seek shareholder approval for higher dilution limits.

For more information on the revised Investment Association guidelines please read our briefing note.

PISCES - A new trading platform for private companies

PISCES (short for Private Intermittent Securities and Capital Exchange System) is a new type of regulated trading platform for shares in private companies. PISCES could provide participants in private company share plans a means of realising their investment, particularly where an exit event (such as a sale or flotation) is not on the horizon. The Chancellor’s announcement that transactions within PISCES will be exempt from stamp duty and stamp duty reserve tax may also add to its appeal. It’s important to note that PISCES can only be used for the sale of and purchase of existing shares (it cannot currently be used to raise funds or for share buy-backs) and only certain categories of individuals and institutions can buy shares on the platform (which includes employees, directors and trustees of EBTs). Although there are still a number of details to be ironed out, especially regarding the valuation, income tax and NICs treatment of shares traded on PISCES, the project is moving at pace with the government aiming to introduce the legislation by May 2025. If you are adopting new share plans in 2025, it would be worth considering whether and how PISCES might fit within the rules. This is particularly the case with tax-advantaged share plans where the drafting requirements are generally quite prescriptive. For example, you might want to think about creating an exercise event for options if a PISCES trading window is opened. The Incentives Team is actively involved in responding to all government consultations on PISCES with a particular focus on employee share plans and we look forward to working with our clients on this developing area.

Global mobility

New rules for employees with overseas workdays

The existing tax regime for individuals who are UK resident but not domiciled here (non-doms) is about to change. One of the features of the current rules is “overseas workday relief” (OWR) which provides income tax relief for the overseas earnings (including income from employment-related securities such as share options) of a non-dom provided they are paid and kept offshore and relate to days spent working abroad as part of their UK employment.

From 6 April, the non-dom regime will be abolished and replaced with a new set of rules based on an individual’s residence. Under the new system, individuals will be able to claim 100% tax relief for their foreign income and gains (FIG) in the first four years of UK tax residence as long as they were non-UK resident for the ten years before their arrival. As part of these reforms, OWR will be based on an individual’s residence rather than their domicile. Unlike the existing OWR, the new relief will be available for four tax years and the relief will not depend on keeping the overseas income offshore. However, unlike OWR, the new relief must be specifically claimed by way of a special election, is subject to a monetary cap (although there are transitional provisions), and will not be available after the initial four-year period of residence has ended until the individual has been non-resident for ten consecutive years.

The annual return for non tax-advantaged share schemes (i.e. the “Other” return) contains questions on each tab which reference apportionment for residence or duties outside the UK. In their November Employment Related Securities Bulletin, HMRC stated that the questions on the annual return template will not change but the guidance notes for those questions will be updated for 6 April 2025.

New procedures for section 690 directions

Currently, if in a tax year an employee performs duties both in the UK and overseas and only some of their employment income is subject to UK tax (for example because they are non-UK resident for tax purposes or entitled to OWR), a UK employer can apply to HMRC for a direction (a section 690 direction) specifying the portion that is subject to PAYE. Without this direction, the employer must operate PAYE on the full amount of PAYE employment income leaving it to the employee to claim amounts overpaid from HMRC (generally through filing a self-assessment tax return after the end of the tax year).

These applications can take a while to process, creating both uncertainty and potential cash flow issues. To remedy this, from 6 April 2025, the procedure will change so that rather than having to wait for HMRC to issue a section 690 direction, an employer will be able to apply PAYE on the basis of the application as soon as an HMRC officer acknowledges receipt of it. If HMRC doesn’t agree with the employer, it can issue a direction that PAYE should be operated on a different amount (up to 100% of the payment) which will take effect as soon as it is given. If an employer wants to change the portion specified (for example, because the number of days working in the UK has increased or decreased) it can do so by making a subsequent application.

Currently, the best way to apply for a section 690 direction is online, via the employer’s government gateway account. For further details, please visit HMRC’s webpage.

The UK’s new Electronic Travel Authorisation Scheme

The UK Government is in the process of rolling out a new Electronic Travel Authorisation (ETA) system to give travellers digital permission to travel to the UK and operate in a similar way to the ESTA system in the US. Eventually, this requirement will mean that everyone visiting the UK (other than British or Irish nationals) will need to either hold an ETA or a visa before they travel to the UK. The next phase of the rollout started on 8 January 2025 when it applied to non-EU nationals (this includes those from the US, Canada and Australia) and from 2 April 2025 it will extend to EU nationals. Applications cost £10, must be made online or via a new app and should be made before travel to the UK. Normally individuals will receive a decision on their application within 3 working days and it will be valid for up to two years (or less if the individual’s passport will cease to be valid before then).

Business visitors to the UK may not need a visa (provided they restrict their business activities whilst in the UK) but will still need an ETA. Employers should update their internal processes and checklists when arranging business travel for their employees to include this requirement.

For more information on global mobility, please visit our dedicated page.

Benefits in kind and payroll

Mandatory payrolling of benefits in kind

Currently, rather than reporting benefits in kind on form P11D at the end of the tax year, employers can choose to account for the tax due in real time through the payroll. From 6 April 2026, it will be mandatory to report and pay income tax and Class 1A NICs on most benefits in kind through payroll although it will continue to be voluntary for employment-related loans and accommodation for a period of time.

Official rate of interest to change in-year

Loans 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. This practice will change from 6 April 2025 when the official rate will be reviewed quarterly. This means that it could fluctuate during a tax year so employers providing 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.

The Travers Smith Equity Academy – 'All you need to know about equity'

Our inaugural Travers Smith Equity Academy was launched in autumn 2024 and is a free once-a-fortnight, online training programme delivered by specialist Travers Smith lawyers. The Academy covers equity from both a corporate and a tax perspective and is pitched at junior professionals who are involved in decision-making in this area and provides a useful refresher for those more familiar with the issues. Although some sessions include technical material, most of the sessions are dedicated to practical points, market trends and hot topics for the future. Further details of the sessions and dates can be found on our Academy webpage.

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