Share incentive plans (SIPs) enable eligible employees of a company to acquire shares in either their employer company or, in the case of a group plan, the holding company.
SIPs must be open to all employees who are subject to UK tax on employment income. The 'partnership shares' element detailed below can be used to replicate US Stock Purchase Plans.
What is a SIP?
Under a SIP, employees may be offered up to £3,600 of 'free shares' each tax year and may buy up to £1,800 of 'partnership shares' each tax year from their pre-tax salary. In addition, employers may give up to two additional 'matching shares' for each partnership share an employee buys. The maximum possible combined entitlement in any tax year under a SIP if the company decides to use free, partnership and matching shares to their full extent is £9,000.
A SIP is a tax-advantaged share plan and, provided that certain criteria are met, shares can be acquired free of tax.
A SIP is an all-employee scheme, and must therefore be offered to all employees on the same terms. A period of qualifying employment of up to 18 months may be imposed by the company.
The SIP uses a trust structure. A UK-based employee trust will purchase, or subscribe for, the shares to be used for the purposes of the SIP and will hold the shares on behalf of employees.
Free shares
Each employee can receive up to £3,600 of free shares a year. These must be given to all employees on the same terms. However, the allocation of free shares may differ dependent on remuneration, length of service or hours worked; or may be linked to individual, team, divisional or corporate performance subject to safeguards to maintain the overall 'same terms' principle.
The SIP must provide for a holding period of between three and five years before which free shares cannot be withdrawn from the plan unless the employee leaves or a 'company event' occurs such as a change of control of the company in specified circumstances. The SIP may also provide that free shares will be forfeited in circumstances set out in the SIP rules or in ancillary documentation.
A SIP is a tax-advantaged share plan and, provided that certain criteria are met, shares can be acquired free of tax.
If the employee leaves the company within three years after the shares are acquired, the employee will be obliged to pay income tax (and possibly NICs) on the market value of the shares at the date of leaving. An employee who leaves between three and five years after the shares are acquired will pay income tax on the lesser of the market value of the shares when they were awarded and their market value at the exit date.
Free shares must be withdrawn from the SIP when an employee leaves. An employee will not suffer income tax and NICs on withdrawal of the free shares from the SIP at any time if the employee leaves for a specified 'good leaver' reason; the free shares are forfeited under the SIP rules; or the free shares are withdrawn from the SIP early following a specified company event.
No CGT is charged when free shares are withdrawn from a SIP, or while the free shares are in the SIP. If the free shares are not sold immediately on withdrawal, CGT will be charged on any increase in value after withdrawal to the extent that the gain exceeds the employee's unutilised annual CGT allowance.
Partnership shares
The employer can invite potential participants to agree with the employer to allocate part of their pre-tax salary to buying shares, with a limit of £1,800 a year or 10% of the employee's salary – whichever is less. The SIP may provide for deductions to be either accumulated for up to 12 months then used to buy shares, or to be immediately invested following each deduction from the employee's monthly pay.
Pay used to buy partnership shares will still be counted as salary for pension purposes, although participants must be warned about possible loss of National Insurance-related benefits. As participants use their own money to purchase partnership shares upfront, there is a degree of investment risk involved through exposure to share price movements. However, the overall financial exposure is reduced as the partnership shares are purchased out of pre-tax salary.
Partnership shares may be withdrawn from the SIP at any time. However, if this happens within three years of investing, income tax and NICs are charged on the value of the partnership shares at that time. If the partnership shares are withdrawn between three and five years from their acquisition, income tax and NICs are chargeable on the amount of salary used to buy the partnership shares or, if less, the market value of the partnership shares at the exit date. After five years, partnership shares may be withdrawn from the SIP without any income tax or NICs being charged.
Partnership shares must be withdrawn from the SIP when an employee leaves. An employee will not suffer income tax and NICs on withdrawal of the partnership shares from the SIP at any time if the employee leaves for a specified 'good leaver' reason or the shares are withdrawn from the SIP early following a specified company event.
Matching shares
Up to two matching shares may be provided free to employees for each partnership share they have bought. Matching shares have the same holding period as free shares and may be forfeited in the circumstances set out in the SIP rules or in ancillary documentation, including if the employee withdraws the corresponding partnership shares from the SIP within three years.
Matching shares effectively create a discount on the purchase cost of partnership shares. For example, if two matching shares are given for every one partnership share purchased, an employee gets three shares for the price of one - representing a 66% discount on each share.
The tax treatment of matching shares is the same as for free shares.
Dividend shares
In addition to the three different types of shares that can be offered under a SIP outlined above, the company can allow or require cash dividends paid on SIP shares to be used to buy 'dividend shares'. Dividend shares are tax free provided that they are held in the SIP for at least three years. If dividend shares are withdrawn from the SIP within three years, income tax is charged at the prevailing dividend rate at the time the dividend shares are withdrawn on the amount of the cash dividend originally used to acquire the dividend shares subject to the annual dividend allowance. No income tax will be payable on the release of the dividend shares if the employee's total dividends for the relevant tax year are within the dividend allowance (with any dividends in excess of the relevant allowance taxed at the prevailing dividend rate). NICs are not chargeable on dividend shares in any circumstances.
Dividend shares must be withdrawn from the SIP when the employee leaves. An employee will not suffer income tax on withdrawal of the dividend shares from the SIP if the employee leaves for a specified good leaver reason or the dividend shares are withdrawn from the SIP early following a specified company event.
Company's tax treatment
The company will obtain a tax deduction for the costs of setting up and running a SIP, and for the market value of free and matching shares awarded. The company's NIC treatment follows the employee's and will depend on when the shares are removed from the SIP.
Administration
The SIP must be registered with HMRC through the company's Government Gateway portal, and the company will be required to certify that the requirements of the relevant tax legislation are met in relation to the SIP. Annual returns must be filed for the SIP via the portal following the end of each tax year.
As the administration of a SIP can be complex, most companies engage professional administrators to help them operate their SIP.
Qualifying shares
Shares awarded under a SIP must form part of the ordinary share capital of the company, be fully-paid and not redeemable. They may be non-voting shares. It is possible for companies that are not listed to use a special class of shares for employees for the SIP.
The shares must either be in a company listed on a stock exchange, or in a company that is not under the control of another company. Shares of a subsidiary of a listed company may be used, provided that company is not 'close' (generally, a small company with no more than five controlling parties) for tax purposes.
Other HMRC tax-advantaged plans
Sharesave/Save As You Earn (SAYE) plans are the other current form of HMRC tax-advantaged all-employee share plans. For more information, see our separate Out-Law guide.
HMRC tax-advantaged discretionary share option plans are also sometimes offered by companies to all employees.
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