Understanding Share Incentive Plans

Share Incentive Plans (SIPs) are tax and National Insurance contributions (NIC) advantaged plans that help employers encourage employees to hold shares in the company they work for.

Under a SIP, an employer can give staff up to £3,600 worth of free shares a year. They are one of the most tax-efficient schemes but they must be open to all eligible employees.

Share Incentive Plan Features

There are three main types of plan shares:

  • Employers can give staff up to £3,600 worth of free shares a year (‘free shares’)
  • Each year, employees can buy a further £1,800 worth of partnership shares from their gross salary, or up to 10% of gross salary, whichever is less (‘partnership shares’)
  • Employers can give up to two matching shares for every share the employee buys (‘matching shares’)

Unlimited dividends on shares in the plan can be invested in new shares, provided these are held for a minimum of three years (‘dividend shares’).

Various combinations of the types of plan share can be used. For example, free shares only, or
partnership shares with or without matching shares, or any other combination to suit the business needs of the company.

Eligibility and conditions

Both listed and unlisted companies – UK and non – can establish a Share Incentive Plan.

The Share Incentive Plan shares must be ordinary shares in the company – although they may be subject to certain conditions. For example, the shares may have limited or no voting rights.

Whilst the Share Incentive Plan must be open to all employees, an employer may set an eligibility period relating to how long an employee has worked for the business – up to a maximum of 18 months of service. Although companies must offer participation to all eligible employees, the employees themselves may of course decide not to take part.

As well as being able to choose between the four different kinds of plan shares to build a plan which suits its business needs, employers can also include other optional features, such as performance-related awards, forfeiture and holding periods.

Tax Advantages of Share Incentive Plans

Employees who receive free or discounted shares in the company they work for normally have to pay Income Tax and NICs on those shares, because they are part of remuneration. However, employees who take part in a Share Incentive Plan will have the opportunity to pay no tax or NICs on the shares they acquire under the plan.

Whether an employee will have to pay any tax or NICs on a particular acquisition of shares will depend on a number of factors, including the type of plan shares and how long the shares are held in the plan.

Under a Share Incentive Plan, an employee can purchase partnership shares out of their gross salary before tax and NICs are deducted, which reduces the amount of salary on which they will have to pay tax and NIC.

There is no tax charge on certain dividends paid on plan shares used to buy further shares (‘dividend shares’) that remain in the plan for at least three years.

Employers get corporation tax relief for establishing, contributing to and administrating the Share Incentive Plan.

How does a Share Incentive Plan operate?

All shares are held in a trust. Share dividends can also be held in the trust.

The plan works by keeping the shares in a trust until the employee either leaves their job or decides to take the shares from the plan. The shares must be kept in the plan trust for five years to ensure the full tax benefits.

HMRC approval

A SIP plan does not need HM Revenue and Customs’ (HMRC) approval before shares under it are awarded to or bought by employees. Rather it is for the employer with their adviser, to set up a Share Incentive Plan which meets all the necessary conditions to qualify as a Share Incentive Plan.

Once set up, the employer must notify HMRC online that the Share Incentive Plan has been set up and self-certify that it meets all the necessary conditions. It must do this by 6 July following the tax year in which shares are first awarded to or bought by employees.

This insight first appeared in our employee share scheme hub.