If you are looking for at least one possible silver lining in the 2009 Budget and related economic tidings, please read on.
 
We are pleased to note that the Budget has made no material changes to the tax advantages under employee share schemes.  Additionally, a broader analysis reveals some compelling positive reasons why companies might consider rewarding some or all of their employees in shares or, if they are already doing this, to increase the level of employee share participation.
 
Increasing higher tax rates and reduced reliefs make the opportunity to participate in a tax advantaged share scheme even more attractive for some employees.  For employees earning over £150,000, the new 50% tax rate taking effect in April 2010 will make the ability to participate in an income tax free share scheme even more attractive.
 
Current climate maximises scope for low tax reward.  The three UK tax advantaged employee share option schemes (EMI, CSOP and SAYE) enable employees' ultimate reward to be taxed as capital gain, at 18%, with the first £10,100 of gains entirely tax free.  Capital gains tax (CGT) is charged on growth in the value of the employer company's shares from the date the option was granted.  For a significant number of companies, it is likely that the Revenue will currently agree to relatively low values reflecting stock exchange valuations, maximising the potential to deliver income tax-free rewards based on future share price growth.
 
The Revenue's own research shows it is likely to improve company performance.  71% of companies surveyed felt that an EMI option scheme had a positive impact on company performance and 82% of companies with a Share Incentive Plan (SIP) felt that it had improved relations between the company and its employees.
 
Increasing higher tax rates and reduced reliefs make the opportunity to participate in a tax advantaged share scheme even more attractive for some employees.  For employees earning over £150,000, the new 50% tax rate taking effect in April 2010 will make the ability to participate in an income tax free share scheme even more attractive.
 
Equity reward can relieve pressure on company cashflow.  As we mentioned in our previous newsletter, a company seeking to reduce fixed costs but wishing to avoid or minimise redundancies can consider asking employees to exchange part of their fixed salary for income tax free shares or options.