A Share Incentive Plan (SIP) is an all-employee share plan which provides statutory tax relief for employees directly acquiring shares in their company.
The SIP creates immediate employee shareholders. Because real share ownership starts on day one, but employees normally can’t sell for five years, you should consider the SIP if you want the risks and rewards for your employees to match most closely those experienced by other shareholders.
How does it work?
Employees can obtain shares in three main ways:
- Purchase – employees may buy Partnership Shares out of their gross pay, with full income tax relief. For example, an employee investing £1000 of pre-tax pay in shares in their company will not have income tax or National Insurance deducted, so that shares worth £1,000 will be allocated. If instead the employee simply took that £1,000 as part of normal pay, tax would be deducted first and what was left would be used to buy shares.
- Free – employees may be allocated Free Shares, without being required to pay income tax or National Insurance on their value.
- Matching – employees may be allocated up to two free Matching Shares free for every one Partnership Share they agree to buy – again without being required to pay income tax or National Insurance on their value.
Also, dividends paid on any of these shares can be paid as additional shares (Dividend Shares) instead of as cash, in which case they won’t be subject to income tax.
Are there any conditions?
- It’s an all-employee plan, so everyone must be invited to participate, although you can require employees to have worked in your company for at least (broadly) eighteen months
- Any shares allocated to employees must be held on their behalf in a special SIP trust – normally for five years to ensure the income tax reliefs.
There are several other conditions, including strict rules as to the type of shares that may be used, and a rule preventing a SIP being used to allocate shares in a subsidiary.
Are there any benefits for my company?
Yes, in addition to the intended positive benefits on your company’s performance:
- Your company doesn’t have to pay employer National Insurance on any pay used by employees to buy Partnership Shares so long as they are retained for five years.
- The cost to your company of providing Free Shares or Matching Shares is deductible against corporation tax
- Any award of Free Shares may be linked to achievement of performance conditions, which can be company-wide or linked to a particular business unit.
- Free Shares or Matching Shares can be forfeit if employees leave as “bad leavers” (dismissal or voluntary resignation) within three years.
Are there any financial limits?
Yes, the following annual limits apply for each employee:
- Partnership Shares – £1,800 or 10% of salary (whichever is lower)
- Free Shares – £3,600
- Matching Shares – up to twice the number of Partnership Shares
- Dividend Shares – no limit
Is a SIP suitable for my company?
Free Shares and Matching Shares can be a powerful way of fostering staff retention, through the ability to forfeit them where employees leave as “bad leavers”.
Where awards of Free Shares are linked to achievement of a performance target, they can be a strong performance incentive.
Partnership Shares are purchased by employees with their own funds, so are often seen as the best way of aligning employees’ and other shareholders’ interests. Take up rates of Partnership Shares are likely to increase where Matching Shares are offered.
There is more information you’ll need to understand before deciding whether a SIP may be the right solution. This guide is intended to provide a brief overview only and we recommend more detailed guidance before making a decision.
Summary of How SIP works
|Tax efficiency (individual)||Tax efficiency (Company)||Ease of setting up||Overall incentive reward value||Other issues|
|Shares may be purchased out of gross pay. Free shares may be given to participants without income tax (IT) or National Insurance (NICs). No CGT on sales of shares.||Corporation tax (CT) deduction on value of free or matching shares. No NICs on value of free/matching shares or on value of shares purchased by participants.||Must be registered with HMRC and market value must be agreed with HMRC.||Straightforward to explain, carries risk in relation to shares bought by participants, tax efficient.||Some companies excluded. Unlikely to be suitable for companies wishing to target rewards to certain people only.|