UK Employee Incentives Update | January 2025
Published on 21st Jan 2025
What's on the horizon in 2025 and recent developments for employee incentives
In this edition, we look ahead at upcoming changes relevant to employee incentives (and recap on developments over the last few months), and our German team considers employee profit participation rights.
What business law changes does 2025 promise in the UK? | Employee incentives
Employers will be preparing for the tax changes announced at the Autumn Budget that take effect from 6 April 2025 – in particular, the increase in the rate of employer's National Insurance contributions (NICs) from 13.8% to 15% and the reduction in the threshold at which employers start paying NICs from £9,100 to £5,000 per year.
Other upcoming changes relevant to employee incentives include the increase in the Capital Gains Tax (CGT) Business Asset Disposal Relief rate, from 10% to 14% for disposals made on or after 6 April 2025 (and from 14% to 18% in the 2026/27 tax year). This follows on from the immediate increase in the CGT main rates announced at the Autumn Budget on 30 October 2024.
The CGT annual exempt amount will remain fixed at £3,000 for the tax year ending 5 April 2026, having been steadily reduced from £12,300 a few years ago. This means that many more employees participating in share plans will need to pay tax and understand their reporting obligations, emphasising the need for clear communications.
Our Insight What business law changes does 2025 promise in the UK? covers the main incentives changes and the full range of legal developments of interest to businesses this year – from case law clarifying areas of complexity to the progress of the new government's legislative programme after last summer's general election
Share Incentive Plan | Statutory notice to be updated
Companies operating tax-advantaged Share Incentive Plans (SIPs) will be aware that participants must be issued with a statutory notice (informing them of the effect that deductions from salary for the purchase of partnership shares may have on entitlement to statutory benefits/payments).
Companies with SIPs are reminded that, for new contracts issued from 6 April 2025, "statutory neonatal care pay" must be added to the list of statutory benefits or payments in the notice. Companies should be working with their SIP administrators and advisers to ensure that the notice is updated.
PISCES | Implementation timeframe
The government is proceeding with the Private Intermittent Securities and Capital Exchange System (PISCES), a new bespoke market for private company shares, with the intention that the legislative framework will be in place by May 2025.
It is hoped that PISCES will be a useful platform for private companies operating employee share plans involving transfers of existing shares. However, there are a number of outstanding issues which are to be addressed (including the impact of the new market on PAYE obligations, valuation and the drafting of exit provisions in plan documentation).
The Treasury is considering feedback on how tax-advantaged employee share schemes such as Enterprise Management Incentive (EMI) options would interact with PISCES, with further updates expected to be provided in the near future – so it is very much a case of watch this space!
HMRC guidance | Recent employment-related securities updates
HMRC published five employment-related securities bulletins during 2024, providing information on developments in this area. Recent updates focus on the tax measures announced at the Autumn Budget 2024, as well as guidance on the EMI independence requirement and following the Supreme Court's decision in the Vermilion employment-related securities case.
Executive pay guidelines | Recent updates
Following a review, the Investment Association published its updated Principles of Remuneration on 9 October 2024.
The updated principles have been simplified to reflect evolving practices in the market and investor expectations. There are three overarching principles, ensuring remuneration policies:
- Promote long-term value creation through the delivery of the company’s strategy.
- Support individual and company performance within the context of sustainable long-term financial health of the business and sound risk management.
- Seek to deliver remuneration levels clearly linked to company performance.
The guidance on long-term incentive plans has been largely rewritten, with the updated principles, in particular, covering hybrid schemes, value creation plans and special awards. The discretion guidance has also been expanded. All-employee plans are now excluded from the expectation of a 10-year life for other plans, and all-employee awards are excluded from the normal 42-day grant window.
The principles are clear that there is flexibility to adapt pay structures to best suit a company’s business and strategy – they are principles, not rules.
Glass Lewis and ISS have similarly updated their guidelines, generally in line with the Investment Association's principles. Listed companies will be discussing the new guidelines with their advisers and key investors.
Germany | Employee Participation: are profit participation rights a tax attractive alternative to VSOPs?
Our German team has contributed to a recent article outlining the key features of a profit participation right designed for employee incentivisation.
On the horizon in the UK | Dates for the diary
Legislation to enact the package of reforms to employee ownership trusts (most of which took effect from 30 October 2024) is currently going through Parliament.
A response to the consultation on improvements to tax-advantaged all-employee share plans is still awaited – it remains to be seen whether an update will be provided during 2025.
Upcoming dates for the diary include:
UK Spring Statement 26 March 2025
End of UK tax year 5 April 2025
ERS reporting deadline 6 July 2025 *
* The deadline for submitting employment-related securities annual returns and EMI notifications to HMRC for the tax year ending 5 April 2025 is by 6 July 2025. Companies operating employment-related securities arrangements should diarise this important date (and ensure that any new schemes are registered promptly so that returns and notifications can be made before the deadline). Note that the deadline falls on a Sunday this year, so in practical terms most companies will be looking to file by Friday 4 July 2025.
