his year has seen in a new era for the UK with a landslide victory for the Labour Party followed by proposals to change the well-known UK employment regime and a much-anticipated Autumn Budget, in which a significant £40 billion tax raise was announced. A number of significant changes were also made to His Majesty’s Revenue & Customs (HMRC) approach to incentives, as well as updates to remuneration expectations by industry bodies.
Incentives in the Autumn Budget
UK employers are navigating a new landscape amid tax rises set out by the Labour Government in its inaugural Autumn Budget on 30 October 2024. An increase of 1.2% to employer social security contributions to 15% was announced which, together with the rise of the minimum wage, seems likely to result in salary freezes.
As such, equity incentives will be an attractive remuneration choice for UK workforces in order to attract key talent and help ease payroll cashflow: in addition, to the immediate dual cashflow benefit of payouts in shares and then years down the line, for equity awards the UK also permits employers to transfer employer social security contributions on to employees (if the related tax credit is applied, this results in a top rate of 55.25% for employees but the employer saves 15%).
It may also be possible to structure equity awards to benefit from the lower capital gains tax (CGT) rates rather than the income tax regime, which often also comes with social security contributions and employer withholding obligations. Despite an increase in CGT, the general feeling on executive share remuneration specifically has been one of gratitude with traditional incentive taxation structures remaining largely intact and the rates being massaged only to the lower end of the range of that estimated and reported more widely in the media beforehand. The new 24% rate remains competitive compared with Europe and so tax-advantaged stock plans look to remain particularly attractive to employers, since they neatly side-step the social security regime and offer a lower tax rate overall to employees (compare 47% for cash incentives) while still offering corporation tax deductions for employers and reducing the burden on payroll.
However, with rates remaining as low as 10% initially, Enterprise Management Incentive (EMI) options remain the incentives crown jewel for UK early-stage companies. Business Asset Disposal Relief (BADR) has been retained together with its £1million lifetime limit (and special rules for EMI options) with only staggered increases on 6 April 2025 and 2026 to 14% and 18% respectively (so remaining below the US top rate of CGT and well below the new UK top rate) but beware of the anti-forestalling provisions if you are exiting before the tax year end. Tax-advantaged Company Share Option Plan (CSOP) options and growth shares – as well as tax-advantaged all-employee share plans, Share Incentive Plans (SIPs) and Save-As-You-Earn/Sharesave Option Plans (SAYE) – are also expected to continue as popular incentivisation tools, attractive to both companies and employees, since they too can tap into the CGT regime, avoid social security contributions and come (in most cases) with appealing corporation tax deductions for set-up and administration costs and on the gain made by employees despite that gain falling outside the income tax regime.
Further reading: see under ‘Relevant Downloads’ on our Employee Incentives and Benefits page
A new private company market and other perks
For listed companies, the budget introduced changes that could affect the attractiveness of the UK Alternative Investment Market (AIM). From April 2026, the rate of business property relief will be reduced to 50% for shares not listed on recognised stock exchanges, including AIM shares. This change may deter companies from listing on AIM due to the tax implications for investors. However, the stamp duty advantages for AIM companies do remain and, to sweeten the blow, the Government also committed, among other things, to investing in British brain power with funding set aside for Cambridge Science Park and rail links between the world-renowned universities in Cambridge and Oxford.
But the real news was the Government re-confirming the introduction of the Private Intermittent Securities and Capital Exchange System (PISCES), allowing both UK and international private companies to admit their shares to the London Stock Exchange (LSE) for short periods with significant stamp duty exemptions. PISCES is expected to start operating in May 2025 and the legislation is already moving forwards at quite a pace. Always keen to explore potential exit strategies and employee shareholder liquidity for our clients, Two Birds is working with the LSE to identify (and try to iron out) any wrinkles in the PISCES proposals.
Day-One Unfair Dismissal Rights
The Labour Government has sent shock waves through the business community with proposals to make the right not to be unfairly dismissed effective from the first day of employment (albeit likely subject to a statutory probation period). On top of the tax changes, is this just one thing too many? Or is the UK package, as a whole, enough to keep the UK an attractive choice for start-ups and to remain the gateway to Europe for established overseas companies?
No doubt, day-one unfair dismissal rights would be a significant shift from the current regime, where employees must have worked for their employer for two continuous years to gain unfair dismissal rights, and so businesses have raised concerns about the costs and complexities of compliance. This is just one of a suite of employment law reforms contained in the Government’s Employment Rights Bill. If enacted, the Bill will require businesses to re-assess many of their employment practices. From an employment perspective, day-one unfair dismissal rights will impact on recruitment practices, as well as performance management processes during probation and require upskilling of managers and updated employment documentation. From an incentives perspective, companies will likely wish to take greater care when drafting employment contracts, ensuring there is an entire agreement clause and excluding any reference to equity awards and ensuring a Micklefield clause has been baked into their employee share plan documentation to protect companies further. There may be an increased reliance on temporary contracts, which could impact the use of some tax-advantaged equity awards, such as SAYE plans and SIPs that often incorporate qualifying employment periods, and companies should re-visit the leaver provisions in their share plan rules.
Certainly, this will require further thought upfront and document reviews/updates but, from an incentives perspective, day-one dismissal rights seem manageable if appropriate care and advance action is taken. In addition, let’s not forget that the Bill’s passage through Parliament may lead to amendments and the unfair dismissal reforms will be subject to consultation next year. Of comfort to companies, the Government has confirmed that the changes to unfair dismissal will not take effect until Autumn 2026 at the earliest, giving a brief respite and time to prepare.
Further reading: UK Unfair Dismissal Reforms
Attracting overseas talent to the UK
It seems that industry bodies have also been considering how best to assist the UK employment market. Following meetings last year with the FTSE 350, the Investment Association has released updated principles of remuneration in October 2024, promoting flexibility in incentive arrangements for the 2025 AGM season. These updates emphasise early (and meaningful) shareholder engagement and transparency, with fewer prescriptive statements and suggest an apparent new acceptance of value creation plans and hybrid schemes in an initial attempt to make UK companies more attractive to overseas talent.
Further reading: EIB Insight: Poaching global talent – can UK listed companies finally be competitive on pay?
HMRC’s helping hand
HMRC have also been playing their part in helping UK businesses with their updated share plans guidance seeking to clarify a number of incentives tax issues and relax previously administratively burdensome rules.
The new guidance includes commentary on whether EMI tax status is retained during sale negotiations and on equity funding rounds, the loss of EMI tax status if certain share plan discretions are exercised and the impact of landmark tax case Vermillion (which has the potential to throw certain equity awards into the income tax regime without specialist advice).
On a more practical level, the reporting deadline for EMI options to obtain their coveted tax status was extended for options granted on or after 6 April 2024 to 6 July following the end of the tax year in which the options were granted (so the first such deadline is 6 July 2025 for EMI options granted between 6 April 2024 and 5 April 2025) and brings the EMI regime into line with the process for other UK tax-advantaged options. In the case of missed EMI notifications in the past, there are no guarantees but, in our experience, HMRC has generally been generous in giving ‘reasonable excuse’ codes to companies who plead their case (presumably recognising that this administrative error by the company causes undue tax hardship on the option holders).
Similarly, the requirement to onerously set out details of restrictions applying to the shares underlying EMI options has now gone and HMRC’s guidance sensibly suggests that, in the case of EMI options granted before this legislative change, notification of such restrictions after grant will often be acceptable to retain EMI tax status.
Further reading: UK: Clarity and confusion – HMRC speak out on EMI tax status during sale negotiations and equity funding rounds
Final thoughts
Nobody likes change but, when taken in the context of broader world events and the advance notice given by the Government, the UK situation is manageable and by utilising equity arrangements you can be one step ahead of cashflow concerns while continuing to attract global talent and reward your UK workforce long-term.
Consider running training sessions and share plan “fire drills” now to identify any document changes you may wish to make upfront in order to protect your company. For companies looking to exit before 6 April 2026, careful structuring of transaction consideration for equity awards can give UK shareholders certainty of tax rates (and perhaps enable them to obtain the lower BADR rates before the stated increases kick-in).
Your trusted adviser
If you are thinking about establishing an employee share plan or have questions regarding your existing plan, please contact Sarah Ferguson or another member of the Employee Incentives and Benefits team at Bird & Bird LLP via: sarah.ferguson@twobirds.com or LDNEIB@twobirds.com and we will be happy to guide you through the process and offer our expert incentives advice.
For further information, please contact:
Sarah Ferguson, Partner, Bird & Bird
sarah.ferguson@twobirds.com
