Spring Budget 2023: payroll and employee incentives
In this section we analyse what the Budget holds on payroll and employee incentives, and what this means for employers and employees.
The process of granting options under the enterprise management incentive scheme to be simplified
12 new Investment Zones announced, with relief for employers' NICs among a package of other measures
Administrative simplifications for options granted under Enterprise Management Incentives
Two requirements for the grant of effective Enterprise Management Incentives (EMI) options will be removed from 6 April 2023, for example EMI option agreements will no longer need to set out any restrictions applicable to the shares. The deadline for notifying HMRC about grants of options under an EMI plan will also change from 6 April 2024.
EMI options granted from 6 April 2023 will no longer need to have details of any restrictions applicable to the shares under option outlined in the option agreements. The granting company will also no longer need to confirm that the employee has signed a working time declaration when an EMI option is granted. In addition, these requirements will be removed for EMI options granted before 6 April 2023 that have not been exercised.
From 6 April 2024 the deadline for notifying HMRC about grants of options under an EMI plan will change to 6 July following the end of the tax year of grant. Companies should note that EMI options granted in 2023/24 will still need to be notified to HMRC within 92 days after grant.
Extra time and costs are incurred by companies detailing the restrictions on the shares under EMI options and explaining them to employees. Many EMI options are only exercised at a time when the granting company is being sold, such that the restrictions on the shares rarely have any impact.
The working time requirements for EMI need to be met throughout the life of the option, with the tax benefits being lost from the date that they are no longer met. As such, a requirement that companies granting EMI options confirm that working time declarations have been signed by their employees at grant was an administrative task that potentially had little purpose. The requirement, however, still remains for the working time declarations to be signed by employees.
As failure to adhere to these requirements risks losing the beneficial tax treatment, their removal for EMI options is welcomed. Similarly, removing the requirement for notification to HMRC within 92 days from the date of grant to the filing date for EMI annual returns (6 July following the end of the tax year) reduces the administration burden for companies. This should mean fewer EMI options from 6 April 2024 are disqualified because of a failure to notify.
When will it apply?
The changes to setting out restrictions in the option agreements apply from 6 April 2023.
The new notification deadline applies to options granted after 6 April 2024.
New elective accruals basis for taxation of carried interest
The Government will legislate to allow investment managers who receive carried interest to elect to be taxed on an accruals rather than receipts basis. This will assist with claims for credit for non-UK tax paid on the carried interest.
Individuals working in private equity are typically rewarded in part through ‘carried interest’, which is a capital entitlement due to them as a result of successful investments by the funds for which they provide investment management services.
In the UK, carried interest is chargeable to capital gains tax, albeit at the higher rates of 18% or 28%.
Carried interest is taxed in the UK when it arises to the individual, but often, where funds operate in multiple jurisdictions, individuals can be subject to tax in more than one country on their carried interest receipts. These different jurisdictions may apply tax on a different basis and at different times, which can create difficulties when claiming relief against the UK tax, even where a double tax treaty applies.
The Spring Finance Bill 2023 will contain provisions allowing individuals entitled to carried interest to elect to be taxed at an earlier point on their entitlement. This will allow them to align the UK and non-UK tax points, thereby ensuring they are eligible for double tax relief.
Carried interest often forms a large and important part of the reward package for those working for private equity funds, but the tax treatment of it can be complicated, with the complication compounded where there are inter-jurisdictional elements to consider.
This proposal directly addresses an issue that can often arise for those entitled to carried interest, so will be welcomed by those affected.
US citizens who are resident in the UK may benefit from these proposals, as the timing of carried interest is often earlier under US principles compared to UK. This may make it easier to claim double tax relief and avoid double taxation.
The Government will also hope that this helps the UK to remain an attractive jurisdiction from which to operate private equity funds.
When will it apply?
For tax years 2022/23 onwards.
Reforming pension tax thresholds
The pension lifetime allowance charge will be removed, before it is fully abolished in a future Finance Bill. Alongside this major change, increases in the annual allowance, the money purchase allowance, the minimum tapered allowance, and the minimum tapered allowance income threshold were also announced.
The lifetime allowance is the maximum amount that can be held in a pension before it is subject to an additional tax charge. Currently, the allowance is £1,073,100. From 6 April 2023, the lifetime allowance charge will stop being levied and from April 2024 the lifetime allowance itself will no longer exist. This means that an individual is no longer restricted on the total amount that can be held in the pension fund.
Despite the lifetime allowance being removed, there will still be a restriction on the total amount of tax-free cash that can be taken from a pension. This will be limited to 25% of the current lifetime allowance, which equates to £268,275. That said, anyone with any form of lifetime allowance protection will still be entitled to a higher level of tax-free cash. It is not yet clear whether or not making future pension contributions will result in this protection being lost.
The annual allowance for pension contributions will also increase from the current level of £40,000 to £60,000, and the ability to carry forward unused allowances for three tax years will remain in place.
Annual allowance tapering will also remain but the threshold after which the annual allowance will be reduced will increase from £240,000 to £260,000. The minimum annual allowance after tapering will increase from £4,000 to £10,000.
Finally, the money purchase annual allowance will increase from £4,000 to £10,000. The money purchase annual allowance may apply if an individual has already started to draw an income from their pension.
Following many years of restrictions being applied to pension savings, this is certainly welcome news. Relaxation of allowances was expected, with specific reference made to NHS doctors, where reports suggested 80% were being caught by the lifetime allowance charge when retiring.
The announcement however takes this further than anticipated with the abolition of the lifetime allowance.
As the Chancellor pointed out, this will not only benefit NHS doctors but also many other pension savers who were reluctant to continue saving into their pension for fear of breaching the lifetime allowance.
As pension funds usually fall outside the scope of IHT, this abolition has the added advantage for taxpayers of providing additional shelter from IHT.
While the lifetime allowance means there is no restriction on the size of a pension pot when taking benefits, tax-free cash will still be limited to 25% of the 2022/23 lifetime allowance.
Additionally, the annual allowance restriction and tapering rules still remain in place, which will limit a high earner’s ability to save into their pension.
Overall, however, a positive set of announcements for those looking to save for the future via a pension.
When will it apply?
From 6 April 2023.
12 investment zones will benefit from preferential fiscal tax incentives available over a five-year period as well as planning liberalisation and wider Government support, to boost development and growth.
Each zone will have access to funding of £80 million over a 5-year period. The tax incentives will be similar to those previously announced for Freeports, including:
- Business rates: 100% relief from business rates on newly occupied business premises, and some existing businesses where they expand in Investment Zone tax sites. Councils hosting investment zones will benefit from 100% retention of the growth in business rates over an agreed baseline for 25 years
- Capital allowances: 100% first-year allowance for companies’ qualifying expenditure on all new plant and machinery assets for use in tax sites
- Structures and buildings allowances (SBA): enhanced 10% rate of SBA, compared to the standard rate of 3%. This allows businesses to significantly accelerate tax relief for the cost of qualifying non-residential investment, relieving 100% of their cost over 10 years
- Employer National Insurance contributions (NICs): Employer NICs will be zero-rate on earnings up to £25,000 per year for any new employee working in the tax site for at least 60% of their time. This relief can be applied for 36 months per employee. Earnings above the £25,000 threshold will be charged at the usual rate above this level
- Stamp Duty Land Tax (SDLT): full SDLT relief for land and buildings acquired for commercial use or development for commercial purposes
The following locations have been proposed for the investment zones in England:
- The proposed East Midlands Mayoral Combined County Authority
- The Greater Manchester Mayoral Combined Authority
- The Liverpool City Region Mayoral Combined Authority
- The proposed Northeast Mayoral Combined Authority
- The South Yorkshire Mayoral Combined Authority
- The Tees Valley Mayoral Combined Authority
- The West Midlands Mayoral Combined Authority and
- The West Yorkshire Mayoral Combined Authority
At least one investment zone is proposed in each of Scotland, Northern Ireland and Wales, with the locations still to be determined.
Shortlisted areas are invited to develop an investment zone proposal, in coalition with local authorities and partners.
Investment zones are not a new concept, and their success is often debatable. Most significant benefits have been observed where the zones build on existing strengths or infrastructure.
The 12 investment zones are a scaling down from the 38 previously announced and present a change in focus.
The proposed zones are likely to be close to existing leading universities and research institutes and are intended to drive growth in five key sectors: Life sciences, Creative industries, Digital technology, Advanced manufacturing and Green industries.
With stability and longevity of commitment being key factors in maximising investment value, the introduction of investment zones should help align public and private investment in such areas.
The Chancellor referenced Canary Wharf and Liverpool Docks as example success stories. The policy focus on existing institutes and specific sectors may help create centres of excellence, however, questions may remain on their ability to help drive long-term regeneration of other deprived areas; particularly with no zones located south of the Midlands.
When will it apply?
Government expects funding to commence in the tax year 2024/25.
Other payroll and employee incentives tax measures
The following is a summary of previously announced payroll and employee incentives measures that have been included in the documentation for this Budget.
From 6 April 2023 qualifying companies will be able to grant options under a CSOP over shares with an unrestricted market value of up to £60,000, which is double the current amount. This accompanies the removal of the ‘worth having’ restriction on the types of shares that can be used in these plans