2023 Spring Budget Analysis: Employment Tax and Reward

Pension tax allowance changes
The lifetime allowance will be abolished from 6 April 2023. This means that there will no longer be punitive tax charges when individuals withdraw money from their pension pot in retirement (in addition to the usual income tax charges) where their total pot has exceeded a certain value.

A 50% increase to the annual allowance (i.e., the amount that can be saved tax efficiently into a pension pot) was also announced. The annual allowance will increase from £40,000 to £60,000 from 6 April 2023. Tapering remains in place, but will now apply to those with an adjusted income of £260,000 or more (previously £240,000 or more) and the minimum tapered annual allowance will now be £10,000 (increased from £4,000).

FTI Consulting Comment:
The abolition of the lifetime allowance will be widely welcomed. When first introduced it was arguably necessary given the extremely generous annual allowance, but more recently became a tax on investment returns within a pension pot and a disincentive for people to save for their retirement. The abolition is a genuine tax simplification measure, meaning people only need to measure what is put into their pension for tax purposes, and not worry about punitive tax charges on the growth within the pot.

The increase in the annual allowance will be good news for higher earners, especially those in defined benefit schemes, and will result in employees being able to save more for their retirement in a tax efficient manner. However, the very highest earners may still be discouraged from continuing to work given the tapering that may apply.

Pension net pay arrangements for lower earners
Where pension contributions are operated by employers through payroll on a “net pay” basis most employees receive tax relief through payroll. However, the lowest earners who do not pay income tax via PAYE (because their earnings are below the tax-free Personal Allowance) do not benefit from this relief. From 6 April 2024, these employees will receive a “top up” equivalent to the tax relief they would have received if they received “relief at source” in their pension scheme.

FTI Consulting Comment:
This measure will ensure that the lowest earners receive the tax relief they are entitled to, and will avoid them being placed at a disadvantage due to their employer’s choice of tax relief mechanism. It also means that employers may be more likely to use “net pay” arrangements which provide benefits to employees who have earnings taxed at 40% or 45%.

For employers who have employees with taxable earnings it is always worth considering implementing a salary sacrifice scheme for pension contributions given that this can save employees’ and employer’s NICs.

EMI options – changes to grant process
From 6 April 2023, employers will have a slightly simplified process to follow if they grant Enterprise Management Incentive (“EMI”) options to their employees:

Employers will no longer have to set out the restrictions that apply to the shares under option within the option agreement; and
Employees will no longer be required to sign a “working time declaration” (although the working time requirements remain).

In addition, from 6 April 2024 it is intended that the 92-day deadline for notifying the grant of EMI options to employees will be extended to the employment related securities annual return deadline of 6 July after the end of the tax year.

FTI Consulting Comment:
This appears to be a genuine simplification measure, which will be very welcome to companies that qualify to issue EMI options. EMI options are aimed at smaller employers and provide significant tax benefits but can be administratively difficult to set up and administer – these improvements will help make access to the EMI scheme more manageable.

These improvements should encourage more qualifying companies to grant EMI options and increase employee share ownership, whilst reducing the number of administrative errors that can cause issues for employers.

CSOP options – previously announced changes
From 6 April 2023, and as previously announced, qualifying employers will be able to grant Company Share Option Plan (“CSOP”) options over shares worth up to £60,000 per eligible employee (doubled from the current limit of £30,000). There is also a technical change to the type of shares over which options can be granted (removing a so-called “worth having” restriction).

CSOPs allow qualifying employers to provide share options to employees which, in the future, can be exercised without the gain being subject to Income Tax or NICs – representing a potentially significant tax saving for both employees and employers.

FTI Consulting Comment:
The significant increase in the value of shares over which qualifying employers can grant options will encourage companies to consider whether the generous tax benefits on offer make it worth setting up a new scheme or issuing further options under an existing scheme. For companies that previously disregarded CSOPs due to the £30,000 per employee limit, this would be an ideal time to re-visit the decision.

Those companies that faced issues due to their share classes may also want to take another look at whether CSOPs can now work for them.

Carried interest – elective accruals basis
UK resident fund managers who receive carried interest are usually subject to tax on carry distributions at the time it arises to them. However, the same income or gains can also be subject to tax in another country. This can create issues where the other country taxes the income or gain earlier than the UK, resulting in fund managers paying double tax. From 6 April 2022 (i.e. on a retrospective basis) new legislation will allow individuals to better align their tax liabilities by electing for their carry (on an irrevocable basis) to be taxed in the UK on an accruals basis – this should help prevent issues where double tax relief cannot be claimed.

FTI Consulting Comment:
It is welcome that measures are being introduced to ensure that unintended double tax liabilities do not arise. Impacted individuals will need to think very carefully about making an election given its irrevocable nature and will need to work through the tax consequences that will apply.

Consultations
The Government announced the following, which will be of interest to employers:

A consultation focusing on using the tax system to encourage employers to invest in occupational health services; and
A call for evidence covering the Share Incentive Plan (“SIP”) and Save As You Earn (“SAYE”) all-employee tax-advantaged share schemes, with the aim of improving and simplifying the schemes.

FTI Consulting Comment:
Both consultations highlight potential tax incentives and simplification measures that, if they come to fruition, will be welcomed by employers. We would encourage employers to respond with any thoughts.

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Published

March 15, 2023

Key Contacts

Lewin Higgins-Green

Managing Director, Head of EMEA Employment Tax & Reward

2023 Spring Budget Analysis: Employment Tax and Reward