Unlocking the benefits of employee share schemes and EOTs post Budget

With businesses still processing the impact of the Autumn Budget, there’s some positive news for companies looking to leverage employee share schemes and employee ownership trusts (EOTs) as part of their compensation and retention strategies, and succession planning.

What’s the impact for employee share schemes?

This Budget includes historic tax raises, including an increase in employer NICs to 15%, expected to contribute around £25 billion annually to the Treasury. Whilst this makes cash pay more expensive, it increases the attractiveness of tax-advantaged employee share schemes including the discretionary Enterprise Management Incentive Scheme (EMI) and Company Share Option Plan (CSOP) which offer employer and employee NIC exemptions, as they give access to capital gains tax (CGT) rates on the benefits provided, providing a compelling alternative to traditional cash-based compensation for employers and employees.

The increase in CGT from 20% to 24% remains competitive compared to other major European economies such as France, Italy, and Germany. And, critically, this rate is still far below the UK's top income tax rate of 45% (or 48% in Scotland), making CGT-advantaged options attractive.

Entrepreneurs and EMI shareholders are also likely to benefit from the retention of the Business Asset Disposal Relief (BADR) annual allowance at £1 million and the 10% BADR rate, which is in place until April 2025. Even as this rate gradually rises to 14% in 2025 and 18% in 2026, it remains a competitive alternative to the combined income tax and NIC rates on unapproved share options, offering a tax-efficient route for those using EMI for share-based compensation.

Are employee ownership trusts still attractive?

If you’re a business owner considering succession planning, employee ownership trust structures are a bright spot in this Budget, continuing to benefit from a 0% CGT rate with no cap on the sale value subject to relief. While the government plans to implement some EOT-related proposals following a recent consultation, these largely align with current practices. However, businesses may need to account for additional procedural requirements – getting good legal advice will be important here, particularly as the devil will be in the detail of these new measures.

With the increase in capital gains tax, business owners may need to rethink their approach to selling. An employee ownership trust could become a more appealing option for securing the future of their businesses, where the business owner wants to transition into long-term employee ownership. Our article, ‘Employee Ownership Trust or a traditional trade sale: What’s the best route for me?’ will guide you in determining the most suitable selling strategy.

If you’re interested in exploring how these changes impact your business or understanding the benefits of employee share schemes and employee ownership trusts, we can help. Contact us using the short form below to discuss how to navigate these new provisions and create a tailored strategy for your business.