Budget 2009: a changed tax environment for remuneration planning
The 2009 Budget contained very few measures dealing specifically with employee share schemes. However, there were several significant proposals to change income tax for those earning more than £100,000, which will substantially change the tax background when planning or advising on share schemes and incentives.Close speedread
A changed income tax environment for the highest earners
The most important general tax developments for share schemes and incentives specialists in the 2009 Budget are various proposed income tax changes for those earning more than £100,000 (see Details of income tax changes for highest earners).
A general increase in national insurance contributions (NICs) (www.practicallaw.com/8-201-8297) of 0.5%, to take effect from 6 April 2011, had already been announced in the 2008 Pre-Budget Report.
Although these proposed income tax and NICs changes do not directly relate to share schemes or bonuses, they alter the context in which employers will assess tax-efficient remuneration proposals including:
Tax-favoured share incentives;
Private equity carried interest and similar incentive arrangements; and
Other arrangements for employees to secure capital gains tax treatment on the growth in value of interests in shares or other securities (such as shared growth plans under which executives purchase interests in shares jointly with trustees of an employee benefit trust (www.practicallaw.com/6-205-8072)).
Many employers will already be taking advantage of at least some of the available opportunities for tax-efficient remuneration for their highest paid employees. However, following the 2009 Budget, there is now likely to be an even greater contrast between the current capital gains tax rate (18%) and the expected effective rates of combined income tax, employee NICs and employer NICs (borne by the employee) on the highest earners' income from securities options, restricted and convertible securities in future tax years:
Highest combined effective rate in 2009/2010 = 48.68%.
Highest combined effective rate in 2010/2011 = 57.4%.
Highest combined effective rate in 2011/2012 = 58.15%.
(For an explanation of the method of calculation of these combined effective rates, see Practice note, Tax Year 2009-2010: Selected tax and NICs data: Combined employee and employer NICs and income tax (with relief for employer NICs) (www.practicallaw.com/7-381-1710).)
The proposed changes to pensions tax relief are also relevant to the overall planning of remuneration packages for highly paid executives, in which pension contributions play an important role.
Details of income tax changes for highest earners
From 2010/2011: new 50% income tax rate for earnings over £150,000
From 6 April 2010, there will be a new tax rate of 50% for taxable income above £150,000. This is a change to the proposals for increased tax on the highest earners already announced in the 2008 Pre-Budget Report.
From 2010/2011: personal allowances will be restricted for those earning more than £100,000
From 6 April 2010, the benefit of the personal allowance to taxpayers with income of more than £100,000 will be progressively restricted. £1 of the allowance will be lost for every £2 of income over £100,000. This is a change to the proposals for personal allowance restriction for higher earners already announced in the 2008 Pre-Budget Report.
From 2011/2012: restriction of higher rate relief on pension contributions for those earning more than £150,000
From 6 April 2011, higher rate income tax relief for pension contributions for taxpayers with taxable income of more than £150,000 will be tapered down. Those with taxable income of more than £180,000 will only get basic rate (currently 20%) income tax relief for pension contributions.
From 22 April 2009: tax on increases to pension contributions in anticipation of restricted higher rate relief
From 22 April 2009 (budget day), anti-forestalling measures will apply to taxpayers who seem likely to be affected by the restriction of higher rate tax relief for pension contributions beginning in the tax year 2011/2012. Anyone:
With income of £150,000 or more in one or more of the tax years 2009/2010, 2008/2009 and 2007/2008;
Who increases their pension savings (including any contributions from employers or third parties) on or after 22 April 2009 above their normal regular pensions savings pattern; and
With total pension savings in 2009/2010 of more than £20,000 (before or after any increase),
will face a special tax charge (under self assessment) to restrict income tax relief to 20% on any additional pension contributions (or on contributions in excess of £20,000 in the tax year, if the regular pension savings are less than £20,000). Avoidance arrangements made to bring 2009/2010 income below £150,000 (possibly also increasing employer pension contributions) have also been anticipated:
Any salary given up under salary sacrifice arrangements on or after 22 April 2009 will be added back when determining whether income is at least £150,000;
If there is any scheme with a main purpose of reducing income to less than £150,000, the income will be deemed to be £150,000; and
Any schemes to avoid the special anti-forestalling charges have also been made subject to the tax avoidance disclosure requirements, so HMRC should get early warning of at least some new avoidance schemes targeting the new charge.
These anti-avoidance measures will probably be refined during the passage of Finance Bill 2009 and similar anti-avoidance measures are likely to be adopted in the main provisions restricting higher rate relief on pension contributions from 2011/2012 (see From 2011/2012: restriction of higher rate relief on pension contributions for those earning more than £150,000).