Employment Tax: What Employers Need to Know
The Chancellor’s second Budget confirmed several headline changes that will affect employment costs and benefits planning over the coming years:
1.Salary Sacrifice Pension Cap
One of the key measures in terms of future revenue generation for the Exchequer was the announcement that from April 2029, the National Insurance Contributions (NIC) exemption on salary-sacrificed pension contributions will be capped at £2,000 per employee per tax year. Contributions above this threshold will attract both Employers and Employees NIC.
While income tax relief remains unchanged, this measure will reduce an employee’s net pay and increase the costs of employment for employers. Furthermore, if the existing Employers’ NIC saving is shared with a participating employee via an enhanced employer pension contribution, the change will actually reduce the overall level of pension contributions made on the employee’s behalf.
Whilst the measure will not take effect for over three years (and may change before we get there given that the next general election is currently legislated to be 2029) employers should review their reward strategies well ahead of this date, considering whether to restructure contributions or enhance alternative benefits.
2. National Minimum and Living Wage Increases
From April 2026, the National Living Wage for workers aged 21 and over will rise to £12.71 per hour, with proportionate increases for younger workers and apprentices. This above-inflation uplift will add pressure to payroll budgets, particularly in labour-intensive sectors. This increase may also have a knock-on effect on pay differentials between levels.
3. Freeze on Income Tax and NI Thresholds
There has been a lot of press attention on thresholds that have been frozen until 2031 and the impact of fiscal drag, pulling individuals into higher income tax brackets as wages rise. However, it is also noted that NIC thresholds were left unchanged as part of the Budget. Given the increases in the National Minimum Wage and National Living Wage, the frozen Secondary Threshold of £5,000 could mean that additional Employers’ NIC is payable by employers because of more employees exceeding the threshold.
4. Positive changes to Enterprise Management Incentives schemes
Thresholds increase
Since its introduction in 2000, the Enterprise Management Incentive (EMI) scheme has been the scheme of choice for companies that meet the legislative criteria. Some of the key thresholds associated with EMI have been fixed for a number of years and therefore the changes announced in the Budget are welcome, in particular:
- Doubling the total value of shares in respect of which unexercised qualifying EMI Options can exist at any time to £6 million (this being measured based on the Unrestricted Market Value at the date of grant);
- Doubling the maximum number of full-time equivalent employees that a company (or if applicable, a group) may have to 250;
- Quadrupling the Gross Assets test at the date of grant from £30 million to £120 million; and
- Increasing the maximum life of an EMI Option from 10 years to 15 years (where such change can be made to certain subsisting options) acknowledging that some companies do take longer to exit events do take longer.
These measures will broadly apply from April 2026 and will have a positive impact for scale-up companies looking to retain and incentivise their employees. For example, under current EMI legislation the gross assets test can often be breached just because of a successful funding round.
Administration simplification
In addition to these threshold changes, the Budget also introduced announced a significant administrative simplification: from 6 April 2027, companies will no longer need to notify HMRC via a separate notification when EMI options are granted. Instead, the grant of an EMI option will be included in the end of year return, EMI40. This change, which aligns EMI options with options granted under a Company Share Option Plan, should reduce compliance burdens for employers without affecting the tax-advantaged status of the options.
Importantly, the tax benefits of EMI remain unchanged – no income tax or NIC on exercise (where options are granted at market value), and capital gains continue to be subject to Capital Gains Tax, with Business Asset Disposal Relief still available (albeit at the revised 14% rate from April 2026) where conditions are met. The reforms announced in the Budget make EMI even more attractive for growing businesses looking to incentivise and retain talent over the long term.
5. Employee Ownership Trusts (EOT) – Capital Gains Tax (CGT) relief halved
EOT’s were first introduced in 2014 with a nod towards the John Lewis partnership model in their implementation. As an alternative to a Management Buy-Out, EOT’s have gained more traction in recent years. This is due to the CGT deferral relief available for those disposing of their shares to an EOT and the ability for an EOT controlled company to pay a tax-free bonus to qualifying employees of up to £3,600 per year.
However, with effect from the day of the Budget (26 November 2025), the CGT relief on disposals to an EOT have been cut from 100% to 50%, with the remaining 50% immediately chargeable to CGT. Furthermore, the chargeable gain is not eligible for Business Asset Disposal Relief nor Investors’ Relief.
Whilst EOT’s will still have their place in succession planning, the impact of the change is to increase the CGT on a qualifying disposal to an EOT to an effective rate of 12% compared with 0% now where the conditions are met.
Summary
The Chancellor’s second Budget signals a further shift towards tightening reliefs and increasing employment-related costs, albeit there is a delay before some of these come into force. Employers should however act now to adapt strategies and ensure they remain competitive and compliant in this evolving landscape.
We are here to help with you and your business to manage employment tax and EMI schemes. Do get in touch with one of our experts if the topics covered in this article raise any questions for you.
Please note that this content is not intended to give specific technical advice. It is designed to highlight some of the key issues rather than provide an exhaustive explanation of the topics. Professional advice should always be sought before action is either taken or refrained from as a result of information contained herein.
