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Clause 46 - Share incentive plans: increases in maximum annual awards etc

Finance (No. 2) Bill – in a Public Bill Committee at 4:15 pm on 8th May 2014.

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Question proposed, That the clause stand part of the Bill.

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

It is a pleasure, Mr Streeter, to serve under your chairmanship again this afternoon. I was beginning to despair that I might not have an opportunity to contribute to the Committee today, but I am happy to find that I will get to have my say.

In essence, clause 46 does three things. It increases the maximum value of free shares that can be awarded annually to an employee from £3,000 to £3,600 by amending schedule 2 of the Income Tax (Earnings and Pensions) Act 2003. It increases the maximum value of partnership shares that an employee can purchase annually from £1,500 to £1,800, although the value still cannot be more than 10% of an employees’ salary. Both those changes come into effect from 2014. Share incentive plans were introduced in July 2000 to give tax and national insurance contributions advantages to employees when they buy or are given shares in the company they work for.

Companies can offer one, or a combination, of four types of shares. The first type is free shares. An employer can award up to £3,000 of free shares in any tax year. The clause increases that amount to £3,600. An employer can choose to link the award of shares to its employees’ performance. The second type is partnership shares. Employees can buy partnership shares using their gross pay, but there are limits on how much can be spent. The clause increases that limit from £1,500 to £1,800. The third type is matching shares, where employees can buy partnership shares that will be matched by their employer, giving them up to two free shares for every partnership share they buy. The fourth type is dividend shares. As a shareholder, employees may be paid dividends on their  shares. If dividends are received on free, partnership or matching shares, employers may allow employees to use those dividends to buy more shares. Employees can use up to £1,500 of plan dividends in that way in any tax year.

The impact of the clause on the Exchequer is a cost of £5 million in 2014-15, and the same amount in each year until 2018-19. Share incentive plans were introduced in 2000 as all-employee share ownership plans, which were the successor to the approved profit-sharing scheme, which ran from 1978 to 2002. They were rebranded in 2001 as SIPs, and very little detail had changed until the announcement in the autumn statement. We support the principle of encouraging saving through tax-advantaged schemes, but we want to ensure that this aspect of the tax system is having the desired effect and that take-up levels are good and spread out across different types of business and employee and across the economy, both by sector and by region.

The Quoted Companies Alliance welcomed the changes made under the clause. It made the point, which it has been vigorously pursuing, that the limits should rise in line with inflation. It would be helpful if the Minister indicated whether the Government have received additional representations of that kind. Are the Government reviewing the linking of limit rises to inflation or thinking of doing that at a later point?

This feature of the tax system is there because Governments of different party political persuasion have wanted to encourage employees to behave sensibly and responsibly by saving for their futures. It would be helpful if the Minister indicated whether the level of take-up is sufficiently high to justify Government incentivisation and intervention in this aspect of the tax system. This is one of the first changes to SIPs in a very long time, so is he sure that the change will, in and of itself, increase take-up? Is there sufficient knowledge of these schemes to ensure that they are as successful and taken up as much as possible?

Photo of David Gauke David Gauke The Exchequer Secretary

The clause, as we heard, increases the limits on the value of shares that employees can obtain under share incentive plans. SIPs are all-employee share schemes under which employees can purchase shares or have shares awarded to them, with favourable tax treatment.

The clause increases, from 6 April 2014, the maximum value of SIP free shares that can be awarded annually to an employee from £3,000 to £3,600, and the maximum value of SIP partnership shares that an employee can purchase annually from £1,500 to £1,800. By helping employees to acquire a stake in the company they work for, SIPs have an important role in encouraging the work force to identify with the fortunes of the enterprise and to share in its success.

As a separate matter, we have also increased through secondary legislation the limits on the maximum amount employees can save under tax-advantaged save-as-you-earn share option schemes. These increases to the limits under the all-employee SIP and SAYE underline the Government’s commitment to the schemes, which are popular with employees and employers alike.

To answer the hon. Lady’s questions on take-up, in 2011-12 the number of companies with tax-advantaged  employee schemes increased by 3%, to 9,260. Clearly, this measure should support that and a significant increase in the limit may further encourage take-up.

On whether the limits should be indexed and rise annually in the same way that ISA limits increase—we received a representation on that—it is worth saying that there are differences between SIP and SAYE employee share arrangements, which are available only to employees of certain companies, and ISAs, which are general purpose broad-based mainstream savings accounts used by millions of savers. Different considerations must be taken into account when setting limits for these schemes, including the need to ensure a fair distribution of tax advantages and helping people achieve flexibility in the way that they save and invest.

The increases in the SIP and SAYE limits that we have announced are significant and exceed a simple indexation of last year’s limits. Although we continue to keep the limits under review, it is preferable to make ad hoc increases when we judge that they are affordable and when the time is right, rather than tying ourselves to a particular formula for annual increases.

The clause makes the scheme more generous and it has been widely welcomed. I hope that the clause meets with the approval of the Committee.

Question put and agreed to.

Clause 46 accordingly ordered to stand part of the Bill.