Following on from the reversal of much of the mini-budget on 17 October, in today’s Autumn Statement the Chancellor announced a number of measures which are relevant to remuneration and incentives. In particular there will be a reduction to the threshold at which the 45% additional rate of income tax applies, the freezing of other personal tax thresholds and significant reductions to the capital gains tax and dividend tax allowances. The previously announced increase to the CSOP limit from £30,000 to £60,000 has been retained.
Income Tax – Additional Rate Threshold
From April 2023, the threshold at which the 45% additional rate of income tax applies will be reduced from £150,000 to £125,140. As the personal allowance tapers off at a rate of £1 for every £2 earned over £100,000, in practice an individual already pays an effective rate of income tax of 60% on earnings between £100,000 and £125,140, and will now pay a rate of 45% thereafter. Individuals already earning over £150,000 per year will pay an extra £1,243 of income tax per year as a result of the reduction in the additional rate threshold.
Capital Gains tax
The Annual Exempt Amount before capital gains tax is charged will be reduced from the current £12,300 to £6,000 from April 2023 and then to £3,000 from April 2024.
The Dividend Allowance will be reduced from the current £2,000 to £1,000 from April 2023, and to £500 from April 2024.
Other Tax Thresholds Frozen
In addition to the above reductions, the thresholds for the 20% basic and 40% higher rates of income tax, the main employee and employer national insurance thresholds, and the inheritance tax threshold have been frozen for a further two years, until 2028.
The Chancellor has avoided making unpopular announcements regarding increased tax rates. Instead the emphasis for personal taxes has been on freezing or reducing thresholds, meaning that over time a greater proportion of earnings and gains will be subject to tax.
For companies that operate all-employee save-as-you-earn (Sharesave) schemes, and those companies that operate CSOP on a broader basis, the reduction in the CGT annual exempt amount is likely to mean that significantly more employees make gains on options that are subject to CGT. CGT rates remain at 10% or 20%, meaning that these schemes are still attractive relative to a non-tax-advantaged scheme which is subject to income tax and NICs. However, as CGT is collected via an individual’s annual self-assessment tax return, employers may find that they are required to notify a much broader employee population of the need to file a return, and may need to educate that population on how the return should be completed.
Separate to the above tax announcements, the government has stated that over the next year it will review retained EU law to identify changes that could be made to increase growth in key sectors. This follows the announcement made as part of the September mini-budget that the government would consult on a deregulatory package for the UK financial services sector, and in particular that the bonus cap for banks would be scrapped. Whether the government will seek to amend the “pay-out process rules” for remuneration as part of this review remains to be seen.
For further information see the Autumn Statement documents published by the government. Legislation to implement these changes will be brought forward in the Autumn Finance Bill 2022.