2023 Spring Budget Analysis: Employment Tax and Reward
March 15, 2023
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).
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.
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.
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.
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.
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.
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March 15, 2023
Managing Director, Head of EMEA Employment Tax & Reward