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National Insurance And Dividend Tax Rise – Is There Much To Fear?

To assist with the funding of the social care system, the UK Government recently announced a 1.25% increase in National Insurance contributions for both employees and employers. This represents a deduction to take home net pay for employees and increases the costs of employment for employers. But how does this impact tax-advantaged employee share plans, for example, Enterprise Management Incentive (EMI) options?

In our view, an EMI share option plan is only enhanced by this ‘tax’ rise. The increase in national insurance rates makes EMI share options more attractive. This is because all gains should, assuming the EMI share option is granted at a fair market value, be taxed under the Capital Gains Tax regime and avoid more costly income tax and national insurance.

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. As the dividend allowance will remain at £2,000, any dividends payable to the EMI shareholder, following the exercise of their EMI share options, would suffer the 1.25% increase. However, in the vast majority of cases involving private companies, EMI share options don’t deliver dividends and are held for capital appreciation. This is because either the shares under option do not carry dividend rights or because the EMI share 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).

While any tax rise is uncomfortable, offering an EMI share option remains an excellent way to reward and incentivise key employees. It is important to bear this in mind when considering recruitment, retention and incentivisation awards.

For more information or advice, please contact our Employer Solution team.

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