Reduction of 50% income tax rate and impact on employee share plans

Michael Deeks, Tax Partner, Olswang

 As widely predicted, the highest (“additional”) rate of income tax will be reduced from 50% to 45% from 6 April 2013. Given that the introduction of the additional rate has not delivered the additional tax revenues expected, it will be interesting to see if this 5% reduction is sufficient to prevent taxpayers from taking steps to mitigate their income tax bills in the way that they clearly have been since the additional rate was introduced in April 2010.

 From an employee share plan perspective, this reduction will mean that where employers pass on their National Insurance contributions (“NICs”) costs to employees in respect of share plan gains, the effective employees’ rate of tax (taking into account the income tax relief the employees receive when they pay the employer’s NICs) will fall from the current 58.9% to 54.59%. I suspect that companies will still look to structure their employee share plans so that employees pay capital gains tax rather than income tax and NICs on their gains.

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