Executive briefing – September 2022

Mini-budget – flash briefing on some of the Executive Remuneration aspects

As we flagged in our briefing earlier this month, the Chancellor of the Exchequer has today announced details of the government’s ‘Growth Plan 2022’. It was styled as a ‘mini-budget’, but it contained several headline-grabbing policies and has been described by Paul Johnson (Director of the Institute for Fiscal Studies) as the “biggest tax cutting event since 1972”.

The key points to note are:

• Abolition of the 45% top rate of income tax, with effect from April 2023
• Reversal of NICs/ HSC levy increases from November 2022 (please see our previous briefing)
• Reversal of 1.25% increase in dividend tax rates, with effect from April 2023
• Maintenance of the current 19% corporation tax rate (cancelling the planned increase to 25%)
• Cap on bankers’ bonuses (based on EU CRD V rules) to be scrapped
• Repeal of off-payroll working rules (IR35), with effect from April 2023

From an executive remuneration perspective, most of these events will occur as outlined but it is worth noting:

· Bonus timing: Reduction in NICs rates will take effect almost immediately from November, but the abolition of the 45% rate of tax will not take effect until the start of the 2023/24 tax year. As a result, UK-based senior executives will pay a top rate of income tax of 40% from April 2023.

FIT comment: When paying 2022 bonuses (typically in March/ April 2023 for December year-end companies), we expect companies will consider whether payments should be made before or after the start of the new tax year (with a potential 5% saving).

· Employee share schemes: The limit for tax-advantaged CSOP options will be increased from £30,000 to £60,000 (of outstanding shares under option using the value at grant) which makes these awards particularly more appealing to senior management below executive level. The increase in the limit will take effect from April 2023.

FIT comment: Relatively few companies have used CSOP in recent years, although a combination of a higher limit and a number of companies having share prices which seem relatively low may lead to this being more attractive as part of a suite of benefits. Indeed, it is timely for companies not operating all-employee share plans to also consider the two other main HMRC tax-advantaged plans (SAYE and SIP).

· Performance conditions: The cancelled rise in corporation tax rates means that performance metrics calculated on a post-tax basis (such as EPS), could become slightly easier to satisfy. However, any potential gain is likely to be offset from wider economic challenges.

FIT comment: Some companies calibrate performance metrics on a pre-tax basis and, therefore, will not be directly impacted by movements in headline CT rates. However, where measures are defined post-tax and targets have been set based on rates that are no longer accurate, committees will need to consider what action (if any) to take. This will require care as the view of executives and investors are rarely the same on this issue.  For companies that have not adjusted their ranges to anticipate the previously announced rate changes, it would seem natural to default to no counter-adjustment.

· Regulatory reforms: The scrapping of the bankers’ bonus cap has been formally announced today. The full details of the changes to PRA/ FCA remuneration codes are not expected until later this autumn, along with wider reform of legacy EU-derived financial services legislation, such as Solvency II. We will provide an update when further details are announced.  

FIT comment: The removal of the 2:1 cap on variable to fixed pay is likely to be welcomed by larger international banks that have bristled at the imposition of higher fixed costs. However, many domestic banks would have preferred to see some liberalisation of deferral rules which place them at a disadvantage to other industries. It remains to be seen whether some announcement on this will follow when details are released later this autumn.

· Reduced income tax rates for senior executives: The abolition of the additional rate of income tax and reduction of NIC rates means that there is now a narrower gap between the net-of-tax position for income tax and CGT based remuneration structures.

FIT comment: Private companies considering whether equity awards should fall within the income tax or capital gains tax net should bear in mind both that speculated closure of CGT structures have not been announced but that the potential arbitrage has narrowed a little.

If you wish to discuss anything arising from this briefing, please ask your usual contact at FIT or call us on 020 7034 1111 or email us at Info@fit-rem.com. 

This paper is intended to be a summary of key issues but is not comprehensive and does not constitute advice. No legal responsibility is accepted as a result of reliance on the contents of this paper.

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