Quarterly Newsletter - Reward issue, Dec 2009
RewardLink
This issue outlines some results from our salary survey of Reward Professionals and discusses ways of adjusting remuneration practices given the proposed tax increases.
Higher Talent has a confidential and anonymous network of reward professionals that exchange information on a regular basis. We have run two salary surveys for reward professionals – one in January 2009 and one in July 2009. We are happy to outline some of the July results here.
It is of no surprise that Median Base Salaries have not altered much in the first six months of 2009. Also that bonus levels have decreased.
If you would like to receive a full copy of the survey or would like to join RewardLink please contact Natalie Ansell on 020 7283 9200 or natalie@higher-talent.com.
Adjusting remuneration practices for proposed tax increases by Michael Landon of MM & K
The extra tax burden
Senior employees in many organisations are looking at the prospect of some significant tax increases over the next two years, which have been proposed by the government.
From April 2010:
- for those with taxable incomes of more than £150,000, the top tax rate will rise to 50%
- for those with taxable incomes of more than £100,000, the personal allowance will be progressively withdrawn
From April 2011:
- both employee and employer national insurance contribution (NIC) rates will increase by 1%
- for those with taxable incomes of more than £150,000, tax relief on pension contributions, from both employees and employers, will be restricted (and this also applies to certainiincreases in pension contributions which are made in the meantime).
Many organisations are looking at ways of reducing the impact of these tax increases on their senior employees. This article discusses some of the approaches which are being taken.
Ways of reducing this tax burden
The main ways of reducing the impact of the tax increases can be divided into four groups:
1. Bring forward payments to the current tax year
By making payments to employees before 6 April the income tax rate payable will be the current rate of 40% instead of the new 50% rate. This is likely to be particularly relevant for organisations which normally pay bonuses in April.
Similarly, some organisations will be accelerating the vesting of long-term incentive (LTI) awards, so that the tax charge is triggered before income tax rates increase. Although feasible in some cases, there are a number of potential hurdles to jump, such as:
- it may be difficult to adjust vesting conditions, particularly performance targets
- shareholders' approval may be needed to change the terms of LTI awards
- the incentive and employee retention effect of the awards may be reduced
- the adjustments to awards for some executives may need to be disclosed to the market.
2. Delay remuneration until tax rates fall again
If it is anticipated that a future government will reverse the proposed tax increases or if the employee expects to have a lower marginal tax rate in later years, for example after retirement, it may be attractive to postpone the taxable event. One approach is to grant LTI awards in the form of share options, or to replace conditional share awards or cash bonuses with nil-priced options.
The advantage of this is that the employee can choose when to exercise the right (up to 10 years after the grant date) and, therefore, the time when the tax liability arises. Another arrangement which has recently become more popular is to make payments into an employee trust, with a sub-trust in favour of the employee and his family.
If structured carefully, the tax charge will be delayed until the employee wishes to withdraw the funds. In the meantime, he can express a preference as to how the amounts are invested.
3. Take advantage of HMRC-approved share plans
Under the following arrangements, employees can receive shares in their company, either free of tax or subject to capital gains tax (CGT), which is currently charged at 18%.
- Enterprise Management Incentive (EMI) awards.
- Company Share Option Plans (CSOPs), which can also be used to make full-value share awards in a tax-favourable manner
- Share Incentive Plans (SIPs)
- Save-As-You-Earn (SAYE) / Sharesave Option Plans
Although SIPs and Sharesave plans must be offered to employees generally, both of these can provide attractive tax benefits, even for higher-paid employees.
4. Other arrangements which attract CGT treatment
A variety of share-based arrangements can be used which result in CGT, instead of income tax and NICs, being charged where there is growth in the value of a company’s shares.
These include:
- employees buy shares at full price, but using a loan from their employer, which is repaid when the shares are sold
- employees subscribe for partly-paid shares, for which the balance is paid when the shares are sold
- employees are awarded shares with restrictions but elect to pay income tax on the full share value at the awardidate
- joint share ownership or growth share plans, in which the employee is only entitled to benefit from future increases in the share price (not the value at the grant date).
All of these arrangements can be very attractive where there is a prospect of significant increases in the share price. However, there is a risk of loss to the employee if the share price falls.
Should your organisation consider these arrangements?
The appropriate approach for each organisation will depend on its particular circumstances. The first priority should be to ensure that the remuneration arrangements meet the organisation's own objectives for rewarding employees, including attracting and retaining key people and ensuring that they are well-motivated. Tax saving measures can then be used, where appropriate, to make the total package more attractive to employees or more cost-effective for their employer.
The total tax impact will need to be considered. For example, some of the plans referred to above will improve the tax position for employees but will not qualify for a corporation tax deduction. In addition, tax rates may change again in the future – putting in a plan which results in a CGT charge may not look so attractive if the CGT rate is increased before the awards are realised.
Despite these reservations, many companies have already adopted the various tax-saving arrangements described in this article and it is likely that one or more of them will be suitable for your employees as part of a well-designed overall remuneration package.
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