The Budget contained only good news for employee share schemes, although nothing of immediate value!
For smaller companies, there was the news that the maximum value of shares which can be put under option under the EMI scheme will more than double from £120,000 to £250,000 (from a still undecided date). Also, the applicable rate of tax on relevant capital gains will fall to 10% (from 6 April 2012).
The timetable for implementation of both of these is unclear as they are dependent on European approval as potential State aid but if and when they are implemented, companies which have already granted EMI options up to the existing maximum of £120,000 will be able to grant additional options to relevant employees up to the new maximum. An option package over up to £250,000 of shares will certainly be a valuable incentive for anyone joining this kind of company.
Also, given that the proposed fall in tax rate to 10% takes effect from 6 April this year, optionholders thinking of exercising in the next month or so may sensibly wait if they can until the new tax year at least to have some hope of the lower rate applying.
50% tax rate ending
The fall in the top rate of income tax from 50% to 45% from 6 April 2013 (ie next year) gives rise to all sorts of opportunities for employers and employees to save tax by delaying payments of bonuses and vesting of shares awards until after that date.
In early 2010, many companies accelerated bonus payments and share vestings so that they were able to be taxed at 40% before the 50% rate came in that year. Now they should consider acting the other way - to delay payments, and given that bonuses for 2011 are now starting to be paid, some companies may wish to take urgent action. Companies may enjoy the cash flow benefit of deferral of cash bonuses, but there could be some downside.
Individuals will need in some cases to accept that if they leave employment in the meantime they will lose rights altogether. If they do, in retrospect they might well wish to have taken the bonus and paid 50% tax rather than not get anything at all. Of course, there is also a fear (as with all trends that become too popular) that if income tax receipts fall because of mass deferral, then the effect of delaying bonuses etc in this way will be reversed by specific anti-avoidance legislation neutralising any benefit. This was a fear in 2010, which never materialised, but that does not mean that it is not a relevant concern.
Approved plan simplification
Finally, it has been expected that the Government would announce that it would be pressing ahead with the deregulatory measures recommended in the recent Office of Tax Simplification report (see our earlier Law-Now). This is expected to lead to companies being able to introduce and change their HMRC approved schemes more easily. Additionally a number of other measures are expected, including to not have to report EMI options within 90 days of grant but instead in the annual return and provide for good leavers to generally have favourable tax treatment. However, the Government has delayed making an announcement here - though there seems nothing sinister in that, just that the Government needs more time to consider its response given the large number of recommendations made.