- within Government and Public Sector topic(s)
1. The challenge of rising employment costs
April's increase in employer's National Insurance contributions (NICs) to 15% is just one of the reasons for businesses seeking cost effective ways of rewarding and incentivising their workforce. Companies could consider using incentive structures to reduce their exposure to the employer's NICs rise including through salary sacrifice arrangements, providing tax-advantaged share incentives and/or transferring the employer's NICs on option gains to employees.
An effective salary sacrifice arrangement requires careful structuring and for information on how to do this please see our article.
Incentives that are taxed as capital gains still have the advantage of lower headline rates (currently 18% and 24% for basic and higher rate taxpayers respectively) and, importantly, do not attract National Insurance contributions or Apprenticeship Levy. Although the annual gains a person can make before paying capital gains tax has dropped to £3,000, capital treatment still offers other exemptions and cash-flow advantages. Qualifying Enterprise Management Incentives (EMI) continue to benefit from lower capital gains tax rates (currently 14%).
At the time of publication, we are anticipating the Chancellor's Autumn Budget and, although she has restated the Government's commitment not to raise taxes on "working people", it seems nothing is currently off the table. For example, there have been suggestions that, at some point in the future, the Government should consider limiting the employer's NICs relief on salary sacrifice arrangements for pension contributions.
2. The rise of the cross-border worker
Multi-jurisdictional working is here to stay. Tax and social security agreements haven't necessarily kept pace with this development and, as a result, the tax and social security liabilities of cross border workers can be very complex. The UK has tax treaties with many jurisdictions but the same cannot be said for social security. However, earlier this year, the UK Government announced that it would be expanding its network of reciprocal agreements by entering into a new social security agreement with India.
Having workers in multiple jurisdictions not only complicates the tax and social security position, it also creates additional administrative burdens for businesses. The UK tax authorities are trying to alleviate these by introducing more online notification systems and publishing additional guidance on areas of uncertainty. For example, the process for operating PAYE on employees with non-UK income has been modernised. Previously, employers would apply to HMRC for what were known as 's690 directions' to only operate PAYE on the income relating to an individual's UK duties. However, employers would not be able to do this until they had received written authorisation from HMRC (which could take some time). On 6 April this year, a new annual online notification system was introduced which allows businesses to operate PAYE on a modified basis as soon as the application has been acknowledged by HMRC. It is important to note that any s690 directions issued before 6 April 2025 ceased to have effect from that date and needed to be refreshed. Further, unlike the previous system, a new notification needs to be sent for each tax year the modified PAYE basis is to apply.
NICs guidance for internationally mobile workers: HMRC recently updated its guidance on NICs for internationally mobile workers. Where a person spends part of their time working in the UK, a question arises over whether UK NICs are payable on their earnings. If there is a social security agreement in place between the UK and the individual's home state, this will usually determine which jurisdiction can levy social security contributions (sometimes for a fixed period of time). However, where no such agreement exists or the period of coverage has ended, there has historically been some uncertainty as to whether UK NICs are due on (i) all the individual's earnings (if they are within the UK social security net at that time) or (ii) only those earnings relating duties performed when they were within the scope of UK NICs. HMRC has now confirmed that it considers the second approach to be the correct one. This means that if an employee and employer were liable for NICs when the duties were carried out, NICs will be due on any payment relating to those duties (such as a bonus) even if it is made at a time when the employee is outside the UK social security net and vice versa. It is important to note that HMRC has stated it will apply its interpretation retrospectively, inviting taxpayers to correct historic records for the last 6 years. There is currently a debate as to whether HMRC's interpretation is right (or would need a change in legislation) and employers are recommended to seek professional advice before amending historic payroll submissions.
For information on global mobility please visit our dedicated Global mobility web page.
3. PISCES – a new opportunity for private company share plans
For general information on the new trading platform, PISCES, see section 10 (Equity Capital Markets).
PISCES could offer participants in private company share plans an opportunity to realise their investment in the company even where there is no traditional exit (such as a sale or flotation) in prospect. If you are a private company adopting a new share plan, it is worth considering whether and how PISCES might fit within the plan rules. This is particularly the case with tax-advantaged share plans where the drafting requirements are quite prescriptive. For example, you might want to think about creating an exercise event for share awards if a PISCES trading window is opened. If you already operate tax-advantaged EMI or Company Share Option Plans (CSOP), you should be aware that, for a limited period of time, existing awards can be amended to permit exercise during a PISCES trading event, provided certain conditions are met.
4. Labour supply chains – new PAYE liabilities for hirers
If you hire workers through a third party (such as an employer of record or an umbrella company), you need to be aware of new PAYE rules that will take effect from next April.
The Government acknowledges that engaging workers in this way offers businesses a flexible and cost-effective means of managing their labour requirements. However, it has also become aware of several cases where the third party employing the worker doesn't meet its PAYE and NICs obligations. Under the new rules, businesses using these hiring structures will become jointly responsible for the PAYE and NICs due on the worker's wages. This means that in cases of error or a failure to pay the correct amount of tax, HMRC can seek recovery from either the third party or (in certain cases) the client that uses their services. The new rules will apply to payments made on or after 6 April 2026 and will apply to existing and new arrangements.
Earlier this year HMRC updated its online "Check Employment Status for Tax" (CEST) tool and related guidance. Companies can use this service to help it decide whether the off-payroll rules (or "IR35" as it is often known) apply. Although the changes to CEST do not significantly alter the basis on which a status determination is made, they are designed to reflect recent case law and seek to reduce the number of cases in which the CEST tool is unable to make a determination.
Given these developments, and the fact that HMRC has won a number of recent employment status cases, companies need to ensure they have the correct internal processes for monitoring their worker supply chains and the appropriate documentation in place.
5. Share plans and leavers – the importance of process
When an individual's employment ends, the impact this will have on their share incentive awards will generally be governed by the relevant plan rules. These might cover a variety of situations depending on the circumstances of the employee's departure.
For example, someone considered to be a "good leaver" might be able to keep their awards for a period of time after employment, whereas a bad leaver might lose them. Quite often, to give companies the maximum amount of flexibility, the grantor will have the discretion to decide whether (and to what extent) the leaver can keep their awards.
In a group situation, practical difficulties can arise where the employer of the leaver negotiating the terms of any exit is different to the entity that granted the option (and has the power to exercise any discretion).
A recent case has shown that, in certain circumstances, the UK courts are willing to uphold an individual's claim to share awards where they were assured they could keep them even though the process set out in the plan rules was not followed. It is easy to see how this can happen, and the case stresses the importance of employers and grantors communicating over leavers and ensuring that the procedure in the plan rules has been followed and documented and notified to administrators.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
