Craig Rothnie

When she delivered her first Budget in October, the Chancellor announced the rise in the rate of employers’ NIC from 13.8% to 15%. This was accompanied by a lowering of the secondary threshold where employers will start paying NIC, decreasing from £9,100 to £5,000 per year.

While these measures have proven controversial with many business groups including the CBI which says they threaten to will ‘undermine investment and jobs,’ they will go into effect from this Sunday.

Many employers may be disappointed about the policy, but there are ways and means of mitigating the impact of the rise in NIC including the implementation of various employee share schemes.

Among the equity reward schemes that are available in the UK are Enterprise Management Incentives (EMI), widely regarded as the most tax efficient option available.

Designed to help attract, motivate and retain staff of SMEs, EMI allows qualifying trading businesses to offer eligible employees company share options through the scheme. It can enable companies to bring in talent which might otherwise be unaffordable by providing employees equity in lieu of a higher salary. With the NIC rise making it increasingly difficult for companies to raise pay levels, the scheme also offers a tax-efficient method for an employer to incentivise and reward staff by giving them a financial holding which they will realise when a business is sold.

Using EMI enables companies to free up cash in the short term which can be invested to help the business grow. It also entitles a company to claim a future corporation tax deduction when shares are exercised.

Notably, the employer and employee should not have any income tax or NIC liabilities on the shares on the basis that market value, based on when they were granted, is paid for them.

On disposal of their shares, an employee will be required to pay capital gains tax, but at lower level compared to income tax rates. Provided certain conditions are met, business asset disposal relief can also be claimed making this a tax efficient option for employees as well as employers.

Along with the incentivisation, retention and recruitment advantages afforded by EMI, the scheme can also enhance a company’s work culture and foster a positive team spirit amongst its people.

For companies that do not meet the EMI criteria, there are other share option schemes available. This includes the Company Share Option Plan, which grants employees options to acquire shares in a business at a later date, and the Share Incentive Plan, which holds shares in a trust for between three and five years where they are shielded from income capital gains tax.

While these schemes may be less tax efficient compared to EMI, they can still prove highly beneficial for all the reasons set out above and are worth exploring for qualifying SMEs.

With businesses bracing themselves for the impact of this week’s NIC increase, EMI and other employee shares can be an effective way to reduce a company’s tax burden. According to HMRC, over 4,000 companies have granted EMI share options alone, with an estimated saving of over £300m in income tax and NIC in the 2023 tax year.

I expect we will see a significant rise in the level of interest amongst businesses looking to implement share schemes over the next 12-months in light of this latest increase in NIC.

Craig Rothnie is a senior manager and lead of the entrepreneurial tax team at accountants CT