UK Tax Policy Reversals and Their Effect on Equity Awards

2022 will be viewed as a year of political turmoil in the UK with three different prime ministers during the year.  While all were leaders of the UK Conservative party, the tax policy objectives were significantly different leading to proposed changes being reversed in some cases.

Recent Developments

From an equity plan perspective, the following changes are noteworthy:

1.25% Health & Social Care Levy

A new 1.25% employee and employer Health & Social Care levy took effect at the beginning of the UK tax year (April 6, 2022) and was implemented through higher rates on the existing UK social insurance program (National Insurance Contributions or "NICs"). The original plan was for the levy to become a stand-alone tax beginning with 2023-24 UK tax year. The distinction between a stand-alone tax and being part of NICs was important from an equity plan perspective because UK tax law permits the employer to shift employer NICs on equity award to employees if certain requirements are met. 

However, this all became academic as the levy was terminated effective November 6, 2022. So going forward, the employer and employee NIC rates remain unchanged from the prior UK tax year. However, during the six-month period ending on Nov 6, 2022, both employers and employees were subject to a slightly higher NIC rate reflecting the 1.25% levy.

Highest Income Tax Rate

As recently as September, the UK government had announced a plan to eliminate the (highest) tax rate of 45% which currently applies to annual incomes in excess of £150,000. After a disastrous reception of the broader budget by the financial markets, this proposed change was walked back shortly thereafter. Further, in the Autumn Statement released on November 17 which focused on the current fiscal challenges, the income bracket for the 45% rate was reduced from £150,000 to £125,140 from April 6, 2023. Keep this in mind when implementing withholding for awards made to UK employees.

Capital Gains and Dividends

The UK government has announced plans to reduce the tax-free annual exempt amount for capital gains tax (CGT) and the tax-free dividend allowance, which will affect employees holding shares. The tax-free amount for CGT is currently £12,300 and this will reduce to £6,000 in the 2023-24 tax year and reduce further to £3,000 from the 2024-25 tax year. The dividend allowance will reduce from £2,000 to £1,000 from April 6, 2023 and then further to £500 from April 6, 2024. This means that more UK employees will be pushed into paying tax on capital gains and dividends, which will have employee tax and reporting implications.

CSOPs

There is a potentially positive development but for a small group of companies that offers a specific UK tax-advantaged stock option plan (CSOP). Options can be granted over shares with a maximum value per individual of £30,000 as at the date of the grant. This limit will increase to £60,000 beginning in the next UK tax year on Apr 6, 2023.

UK Tax Year

Finally, the primary question on some reader's minds—why does the UK tax year end on April 5? The internet offers varying versions of the following story, but ultimately it seems like it was a decision by the British Treasury during the UK's switch to the Gregorian Calendar in 1752!

Hundreds of years ago, on the old British Calendar, the tax year began on March 25 (the old New Year’s Day). In order to align with the Gregorian Calendar, 11 days needed to be dropped from the calendar.  The British Treasury decided that the tax year should remain as 365 days (to avoid a reduction in tax revenue during that year, among other reasons), so the beginning of the following tax year was moved from March 25 to April 5.  A few years later, the beginning of the tax year was advanced to April 6 to address a leap year issue that resulted in another difference.  And while the tax year end date was reviewed last year, it doesn't look like there are any real plans to change it. See the Gov.uk report Exploring a Change to the UK Tax Year End Date.