2022 Autumn Statement Analysis: Income Tax, Employment and Share Schemes

On 17 November 2022 the Chancellor announced a limited number of tax measures impacting workers and employers. The main theme throughout is a freeze in applicable thresholds, using the concept of fiscal drag to bring more income into higher tax brackets. There was also a reduction in the starting point for the 45% income tax rate, now beginning at income over £125,140 (the point at which the Personal Allowance is extinguished).

Income tax and National Insurance Contributions

The Chancellor announced a reduction to the threshold for the additional rate of income tax, but no changes to the underlying rates themselves.

Main rates of income tax
The threshold at which the additional rate of income tax (currently 45%) kicks in will be reduced from £150,000 to £125,140 from 6 April 2023.

The threshold for the higher rate of income tax (currently 40%) sees no change (currently £37,700).

The Personal Allowance – the first slice of income that is tax free for most people with income of less than £100,000 – also remains unchanged (currently £12,570).

These thresholds will now be frozen until April 2028 and will not, therefore, rise with inflation.

Without a change to the restriction of the Personal Allowance (whereby those with income exceeding £100,000 lose £1 of their Personal Allowance for every £2 of income above £100,000) this means that income between £100,000 and £125,140 is taxed at an effective marginal rate of 60%, before the 45% rate is charged on income above £125,140.

Dividend tax rates
No changes to the dividend tax rates were announced by the Chancellor, but a large reduction to the Dividend Allowance (the amount of dividends that are taxed at 0%) was announced. This means the previous rate increase (by 1.25 percentage points) remains intact, resulting in a top marginal dividend tax rate of 39.35% (for additional rate taxpayers).

From 6 April 2023, the dividend allowance will be halved from its current £2,000 to £1,000. It will be cut again to £500, from 6 April 2024.

National Insurance Contributions
Again, there were no changes to the rates of National Insurance Contributions (NICs), meaning that the reversal of 1.25 additional percentage points across the rates (announced by the previous Chancellor and was effective from 6 November 2022) remains. The Health and Social Care Levy will not be re-introduced.

The top marginal rate of primary Class 1 NIC (payable by employees) remains at 2%.

The Chancellor announced that the various thresholds for NICs will remain fixed until April 2028.

FTI CONSULTING COMMENT:
The Chancellor stated that his tax changes would abide by two broad principles – firstly that those who have more should contribute more, and secondly to avoid tax rises that would damage growth.

Keeping the restriction on the Personal Allowance clearly does not meet this first stated goal. Those with income between £100,000 and £125,140 must pay an effective income tax rate that is 15 percentage points higher than those earning more than £125,140. Similarly increased marginal tax rates apply for households with children and earnings above £50,000 where Child Benefit is clawed back. Whilst anecdotal evidence often points to higher earners being willing to pay more tax in general, it must surely be difficult for people in this bracket to accept they should pay a substantial amount more (in percentage terms) than those with more.

With a freeze to thresholds and allowances the principle of “fiscal drag” will bring more people than before into each tax bracket, resulting in a significant increase in tax take over in the coming years. This is particularly the case for those whose income keeps pace with inflation. It has often been an accepted principle that people are less likely to notice paying more tax in this way (compared to an increase in rates), but with such a lengthy freeze and high inflation people may well start to feel poorer, potentially significantly so, without fully realising why.

When the Dividend Allowance was first introduced, in April 2016, it was £5,000. The reduction to a figure just 1/10th of that is an effective large tax increase for those with dividend income.

Capital Gains Tax

Rates and thresholds
Much speculation on potential changes to Capital Gains Tax (CGT) rates amounted to nothing. The CGT rates remain unchanged (currently up to 20%, or up to 28% on residential property and carried interest).

The Chancellor did, however, announce a significant reduction in the annual exempt amount for CGT.

From 6 April 2023, the annual exempt amount will reduce from its current £12,300 to £6,000 and will then be cut again from 6 April 2024 to £3,000.

FTI CONSULTING COMMENT:
Many people were expecting more from the announcement on CGT, potentially to include a significant increase in the tax rates. This did not happen and will leave some questioning whether “those who have more” will still pay less and will not, as the Chancellor announced, contribute more.

The reduction in the annual exempt amount is likely to bring many people who have not previously had to pay into CGT – for example small personal investors who make gains on their investments (held outside of an ISA), or employees making gains on shares they hold in their employer. This will result in more people needing to file Self-Assessment tax returns and additional administrative burdens for HM Revenue & Customs.

Share for share: anti-avoidance
Draft legislation has been published which will amend the CGT share for share exchange provisions (to broadly allow the rollover of gains) and will be effective immediately from 17 November 2022. The effect of this is to deem non-UK sited shares to be UK sited for CGT purposes where those shares were acquired in exchange for UK sited shares.

FTI CONSULTING COMMENT:
This is designed to avoid situations in which individuals “roll over” their gain in UK shares to non-UK shares which may not be subject to UK CGT on disposal (for example, if the individual is a non-domiciled taxpayer using the remittance basis). This will only apply to shares in “close companies”.

Employment taxes

The Chancellor made a few announcements that directly impact employers.

National Insurance Contributions
The Chancellor announced that the threshold at which employers start paying NICs and the employment allowance will be frozen until April 2028, along with the freeze to income tax thresholds and those for employee NICs.

No changes to the rates of NICs were announced. The rate of Class 1 Secondary NIC therefore remains 13.8% for employers.

Company car taxation
The Chancellor announced that benefit in kind charges for fully electric company cars (currently resulting in an annual notional income of 2% of the car’s list price) will increase from 6 April 2025. The percentage used when calculating the notional income will increase by 1 percentage point per year between 6 April 2025 and 5 April 2028 (resulting in a 5% rate increase on 6 April 2027).

The percentage used for other cars will increase by 1 percentage point on 6 April 2025 (up to a maximum of 37%) and remain fixed until at least 5 April 2028.

The company car fuel and van benefit charges will be increased by inflation (in line with the Consumer Prices Index).

National Living Wage
The Chancellor announced the largest ever increase in the National Living Wage. From 6 April 2023 it will be increased by 9.7%, resulting in the main hourly rate being £10.42 (payable to those aged 23 and over).

FTI CONSULTING COMMENT:
The freezing of the NICs thresholds and employment allowance brings the policy of fiscal drag to employers, resulting in increased tax take over in the coming years. This may prove particularly difficult for those employers who are also impacted by the increase to the national living wage.

Due to the mid-year change of NICs rates during the current tax year (6 April 2022 to 5 April 2023) specific care will be required by employers when (1) calculating Class 1A and Class 1B annual contributions (payable on P11D benefits in kind and the PAYE Settlement Agreement); (2) ensuring that the correct rates are used for directors (who are subject to annual calculations of contributions); and (3) ensuring that any share scheme related income is captured and reported in the correct month (to ensure the correct rate is paid).

The Chancellor referenced research that confirmed that half of all new vehicles would be electric by April 2025. However, the company car calculation changes will apply to all vehicles, whether new or not. It will remain to be seen whether this keeps the correct balance to successfully continue to encourage all drivers to make the much-needed switch to electric vehicles (which currently still have a higher list price compared to their internal combustion engine counterparts).

With an increase in the National Living Wage, it remains imperative that employers fully consider all aspects of their compliance – it is not as straightforward as ensuring that an employee’s contractual pay rate is £10.42 an hour given the many complex intricacies of the legislation.

Share schemes

No specific changes were announced by the Chancellor concerning share schemes directly, however some recently announced changes remain in force and some other announced changes may also impact share schemes and their efficiency.

Tax-advantaged schemes: Company Share Option Plan
The Company Share Option Plan (CSOP) is a specific discretionary share option plan that can be used by qualifying companies to incentivise, retain, and reward employees and directors. They are subject to a number of specific (and, at times, complex) statutory provisions.

Qualifying employers are currently able to grant share options over shares worth up to £30,000 to a single individual. This limit will double, to £60,000, from 6 April 2023. This change was announced by the previous Chancellor in September and remains unchanged.

Non tax-advantaged schemes
Most employer share schemes that are not tax advantaged result in employees paying income tax and employee NICs on any gains they make, with employers paying employer NICs (unless they agree, in certain circumstances, for the employee to pay these). There is no expected change to this treatment, although the ultimate tax rates payable may be higher due to the freezing of thresholds.

“Growth” (or “value”) shares
Growth shares are often acquired by employees to enable them to participate in future growth in their employer using a direct subscription of a specific class of share. Given the acquisition, and subsequent disposal of shares, it is usual for such shares to be subject to CGT on disposal. With no change to CGT rates there should be minimal impact on these arrangements.

Carried interest and promote arrangements
The Chancellor did not announce any changes that directly impact carried interest or promote arrangements.

FTI CONSULTING COMMENT:
There was little in the Chancellor’s announcement to concern employers with share plans. The fact that there were no changes announced to CGT rates means that growth share schemes will continue to be of interest to employers, particularly high growth and start-up businesses that are not able to qualify for the Enterprise Management Incentives (EMI) tax-advantaged scheme.

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Related Information

Published

November 17, 2022

Key Contacts

Lewin Higgins-Green

Managing Director, Head of EMEA Employment Tax & Reward

2022 Autumn Statement Analysis: Income Tax, Employment and Share Schemes