Do Companies with Tax-Advantaged Employee Share Plans Have Much to Fear From the NI and Dividend Tax Rate Rises?

While the government may have announced an increase in National Insurance contributions (NICs)  of 1.25% for both employees and employers to help fund the NHS and social care reforms (with effect from 1 April 2022), RM2 note that the attractiveness of tax-advantaged employee share plans is only enhanced by this tax rise.

In relation to Enterprise Management Incentive (EMI) options, the increase in NICs rates makes EMI more attractive.  This is because all gains should (assuming the EMI option is granted at a fair market value) remain within the capital gains tax (CGT) net and outwith income tax and national insurance.

Likewise the Company Share Option Plan (CSOP) is similarly more attractive for broadly speaking the same reasons.

Alongside the increase in national insurance, Boris Johnson also announced a 1.25% increase in the dividend tax rates with effect from 1 April 2022.  The dividend allowance will however remain at £2,000.

As the dividend allowance will remain at £2,000, then dividends that might potentially become payable under the Share Incentive Plan (SIP) to participants are likely in the first instance to fall within the dividend allowance of £2,000.  Consequently, such SIP participants are likely to be insulated from the announced increase in the dividend tax rates.

The same analysis would apply to any EMI option holders who have been able to exercise their options and retain shares (which actually carry dividend rights) in their company. 

However,  we note that most private companies don’t deliver dividends anyway to EMI participants.  This is because either the shares under option do not carry dividend rights or because the EMI options are designed to be “Exit only” options so the participant is not in fact a shareholder (and thus entitled to a dividend) for a meaningful period before the relevant shares are sold to an acquiror (as part of the relevant “Exit” event).

Worth bearing in mind , we believe!