The Share Incentive Plan (SIP) is a tax-advantaged all-employee plan that offers companies the ability to award equity to employees flexibly.
The shares awarded under a SIP are held in a trust and provided they are held for at least five years, the SIP is tax-efficient for both the employer and the employees. There are a number of ways in which the SIP can be operated and the employer can mix and match these modules from year to year.
- SIPs can enable employees to get shares in their employer either free or from gross pay on a discounted basis
- The shares must be held in a trust, set up and operated for the plan, for a minimum of three years and up to five years to obtain the full tax advantages
- SIPs can have a number of different elements:
An employee can receive free shares worth up to £3,600 each tax year. Free shares must be awarded to all employees on similar terms. This means that they must either all receive the same number of shares or the allocation can be by reference to objective criteria such as remuneration, length of service or performance.
Free shares can be forfeited if an employee ceases employment within three years from the date of purchase except in the cases of certain good leavers and tax relief will be limited if the shares are withdrawn within five years.
Employees may be invited to buy partnership shares via deductions from salary pre-tax and National Insurance Contributions (NIC). The company saves employer’s NIC on this amount. Employers can allow deductions of up to £1,800 or, if lower, 10% of salary each year.
Employees can use this to buy shares on a monthly basis or at the end of an ‘accumulation period’. If an accumulation period operates, employees buy shares at the market value at the beginning or end of the period (or the lower of the two).
Where partnership shares are offered, the company can also offer matching shares - up to a maximum ratio of two free matching shares for each partnership share purchased. Matching shares must normally be held in the trust for at least three years and held for five to get full tax relief.
Matching shares can be forfeited if an employee withdraws his partnership shares from the trust within three years from the date of purchase except certain good leavers.
Dividends received on SIP shares can be reinvested into further shares with no limit on the value of dividends that may be reinvested. Dividend shares must normally be held in the trust for at least three years to get full tax relief.
Employee’s tax position
Employees invest their pre-tax salary to buy partnership shares. No income tax or NIC is due where shares are held in the trust for at least five years. There is also no charge if the shares are released sooner in the cases of certain good leavers.
If the employee releases the shares from the SIP trust on/after the five-year maturity date and sells on the same day, no capital gains tax (CGT) will be due. The shares can be held in the SIP trust indefinitely (provided the employment does not cease) and there should be no liability to CGT while that they remain in the trust. The CGT base cost of shares withdrawn from the trust is the market value of the shares withdrawn.
Any increase in the value of shares after they are withdrawn from the trust until sale is liable to CGT subject to the availability of the annual allowance and all usual reliefs to reduce or extinguish the capital gain. Transfers into an ISA are permitted to shelter further capital gains.
Withdrawal of shares within three years
If shares are withdrawn from the trust within three years from the date of acquisition, income tax and NIC will be due on the market value of the shares on the date of withdrawal.
Withdrawal of shares between three and five years
If shares are withdrawn from the trust between three and five years from the date of acquisition, income tax and NIC are payable on the lower of:
- The market value of the shares at the date of withdrawal, and
- The salary used to buy the shares (for partnership shares) or market value on acquisition (for matching and free shares).
Employer’s tax position
The employer is entitled to statutory corporation tax relief for:
- The employee’s salary used to buy partnership shares
- Any additional costs incurred in providing partnership shares
- The market value of matching shares and free shares when they are acquired by the trust
- The set up and running costs of the SIP.
Shares used in a SIP must be ordinary shares that are fully paid up and not redeemable. They must be shares in a listed company or shares in a company that is not under the control of another company unless that company is itself listed. The shares can be non-voting and the company’s Articles of Association may include a requirement that all employees offer their shares for sale if they leave employment.
All employees who are resident in the UK for tax purposes must be invited to participate on the same terms but a minimum qualifying period of service of not more than 18 months may be set. Administration can be outsourced to professional plan administrators.
How can we help?
BDO LLP can assist with all aspects of the design and implementation of your SIP, including performance measures, employee communication and ongoing compliance requirements.
For help and advice on creating a share incentive plan to help your business grow, please contact Andy Goodman or Matthew Emms.
Read more on Share plans and incentives