National Insurance payments will rise in April by 1.25% affecting both employers and employees. But is there an opportunity here to mitigate that hefty cost through tax-efficient share plans? We will look at the options.
The background to this is that on 7 September last year the government announced the creation of the Health and Social Care Levy to fund investment in the NHS and social care, a tax of 1.25%. The levy will come into force in the tax year starting in April 2023 but, as a temporary measure, all three rates of NICs will increase by 1.25% from this April – that’s for administrative reasons because the Revenue hasn’t got time to introduce an entirely new tax, with a new tax base, hence these temporary measures.
The increase is a significant one and, to make matters worse, whilst income tax thresholds will rise in April, they will then be frozen for a further four years until April 2026. That means if wages rise more people will find themselves paying a bigger proportion of their income in tax. And then, on top of that, there’s rising inflation, meaning the cost of living is getting ever more expensive.
So is there an opportunity here to review your share plans and make savings? Lynette Jacobs is a share plans specialist who is helping a number of clients with this and she joined me by video-link to discuss it. I started by asking where the savings come from:
Lynette Jacobs: “The benefit of your employees participating in tax advantaged share plans is that, subject to meeting the relevant requirements for the legislation in relation to that plan, there will not be any either income tax or now, particularly importantly, employer or employee national insurance contributions arising in relation to those plans. So that means if you operate an all employee share incentive plan, the SIP, under which your employees can purchase partnership shares, those shares are purchased out of their gross salary. So that's before the application of any income tax or national insurance contributions. That means that so long as those shares are then held in the SIP, ideally for the full five year period following the time they're acquired, there'll be no employee NICs and the employer company, you, will also save the increased employer NICs contributions that would otherwise be payable in relation to those shares. Turning to other forms of tax advantaged share plans, so your all employees share safe plan, or your discretionary company share option plan, CSOP, or discretionary enterprise management incentive plan, EMI plan, again, when those options are exercised, the shares are acquired, there'll be no income tax or national insurance contributions payable on behalf of either the employee or the employer.”
Joe Glavina: “So, there’s an opportunity here, potentially, to help employees mitigate some of the costs they going to be facing from April?”
Lynette Jacobs: “Absolutely Joe, I mean, we all know about the increases in living costs at the moment, everything's going up in price, it was already and now with the terrible events happening in Ukraine, anything that one can do, always obviously accepting that the employees are going to have to find money at some point generally to buy these shares, whether immediately as they go along buying their partnership shares or when they exercise their options in, say, three years’ time, if it's giving them the opportunity to do so without having that increased employer NICs cost you are offering them a great benefit.”
Joe Glavina: “As I understand it, the dividend tax rate is also going up and that will affect certain plans?”
Lynette Jacobs: “Yes, you're correct, Joe. So again, from 6 April this year the dividend tax rate is going up by 1.25% so, again, if your company has, or is thinking of putting in place, the SIP, the tax advantage share incentive plan, one of the types of share awards that can be made under the share incentive plan are the dividend shares and when dividend shares are acquired by employees, so long as they are then held in the SIP for at least three years from the date they're acquired, they will not be subject to any dividend tax. So, again, you're saving the employee the chance of not having to pay tax especially given that tax rate on dividends has gone up by 1.25%. If they do take them out within that three year period they will pay tax, subject to having gone over the current dividend tax allowance for the year which at the moment is £2,000.”
Joe Glavina: “I think the 1.25% rate increase also affects Long Term Incentive Plans. Is that right?”
Lynette Jacobs: “Yes Joe, again it does, totally. So, in any of the share plans where there is any employer NICs being paid, again, that will be going up by 1.25% so that's why under your share incentive plan, with your partnership shares, the money that the employee puts into their partnership shares equally, subject to the employee keeping the shares in the plan for the full five year period, will not be subject to the employer’s NICs that the employer would otherwise be paying in relation to the salary that they're using to buy those shares. On the exercise of options under a non-tax advantage plan, or a tax-advantaged plan if it's being exercised early, and also nil-cost RSUs, conditional shares under long term incentive plans, there's the employer NICs charge will be increased by 1.25%. In the UK, companies can transfer the employer’s liability to employer NICs arising in those circumstances over to the employee. So that's obviously going to be a good thing for you, the employer, and will continue to be particularly with that additional 1.25% increase, but you should also think about the effect that that's going to have on the employee because they will have the increase in the employer’s NICs and then, if they're taking on the burden of the responsibility of the employer’s NICs, that will clearly be a not very pleasant double whammy and, in the case of an additional tax rate payer, the aggregate tax they would be paying by taking on that employer liability to NICs, will be 56.53%, which obviously is a pretty large chunk of the gain they would otherwise be making on the optional receipt of their RSUs under their LTIP. So, companies should consider how that will be viewed by the employee. Another point just quickly to make is where companies do transfer the employer’s NICs to the employees, that's either by way of the employee giving an undertaking to do that or a formal election under tax rules, next year the employer NICs rates, and employee NICs rates, will go back down to what they currently are but the 1.25% will be picked up through the new Health and Social Care Levy so it will be important to have a look and make sure, if it is intended to transfer that cost over, that it is permitted (a) with legislation and (b) under any agreements in documents you have in place with your employees.”
Joe Glavina: “So I guess your message to HR is you need to make sure your staff understand all these options and the benefits you’ve talked about. So, an important communications exercise here?”
Lynette Jacobs: “Totally, but obviously always with that health warning, you know, that the value of shares can go up and down, and without giving any financial advice as well, but just to explain that if you are buying partnership shares under your SIP or thinking of doing it, and you've got this spare cash, though you want to be careful with your employees at the moment with fuel rises and cost of living rises, but the extra benefit, effectively, if you put your money into your partnership shares. Equally, if you're offering a form of tax advantaged option, again, without pushing them into doing it, explaining the benefit of the fact that you're not going to be paying any NICs when you exercise your options, acquire your shares under the tax advantage plans and I think it would probably be only fair for employers to explain to their employees, where they are transferring the liability of the employer’s NICs to the employees, that the aggregate cost to the employee will be higher following the increase in employer’s NICs.”
Aside from its impact on share plans, the 1.25% rise will hit businesses in many other ways which we have been covering in this programme over recent weeks. There is an issue, in particular, that end users, engagers of services, should be alive to which is who in the supply chain should bear that extra cost? A couple of weeks ago Emma Johnston talked to this programme about that, and why it’s important for end users should check their supply contracts. That programme is called ‘Review supply chains before new 1.25% levy’ as is available now for viewing from the Outlaw website.