What is a Share Incentive Plan or “SIP”?
The SIP is a HMRC approved plan which companies can set-up to provide a tax-efficient way for their employees to acquire a stake in the company. The SIP has various features allowing companies flexibility in plan design. Therefore, not all the general information below may apply to your company’s plan. For full details, please refer to your company’s SIP Explanatory Booklet.
There are four elements to a SIP which can be made up of:
- Partnership Shares
- Matching Shares
- Dividend Shares
- Free Shares
Key Benefits of Participating in a SIP
- Employees can acquire shares in their company (Partnership Shares) by contributions from their pre-tax and pre-National Insurance pay.
- Companies can offer Free or Matching Shares awarded on a tax-free basis.
- All shares acquired by employees under a SIP are completely tax-free if held for the 5 year holding period from their award date.
- There is no capital gain liability on the growth of value of shares whilst they are held in a SIP.
- Employees who leave their company for any reason other than resignation or dismissal, can take out all of their shares free of forfeiture, tax and National Insurance contributions.
For additional details on how the SIP works, please visit the Frequently Asked Questions (FAQ’s) section of the Shares at Work website.
Key Features of Partnership Shares
- Employees can choose to contribute up to £1,500 (or 10% of their salary whichever is lesser) each tax year out of pre-tax and pre-National Insurance pay to buy Partnership Shares. Contributions can be deducted as a regular monthly amount or as lump sums. Savings are then used each month to buy shares in the Company.
- Companies can also operate an accumulation period of up to 12 months, with employees being awarded shares at the lower of the company’s share price at the beginning or end of the accumulation period.
- Companies can choose to offer Matching Shares to Partnership Shares (see Features of Matching Shares
- Maximum eligibility period is 18 months.
- Employees can take their Partnership Shares out of the SIP at anytime, but shares withdrawn before 5 years are normally subject to tax and National Insurance charges unless the employee is leaving under special circumstances.
Key Features of Matching Shares
- Companies can award Matching Shares at a ratio of up to two Matching Shares for each Partnership Share bought by the employee.
- Employees must hold the Matching Shares in the SIP for a minimum of 3 years.
- Employees who leave the company through resignation or dismissal within the first 3 years or take their Partnership Shares out of the plan may forfeit the linked Matching Shares depending on the plan rules.
- The company may withdraw or change the ratio of matching shares at anytime subject to giving prior notice to employees.
Key Features of Dividend Shares
- Companies can allow employees to reinvest dividends they receive on shares held for them in the plan subject to an annual limit of £1,500. Shares acquired in this way are referred to as Dividend Shares.
- Higher rate tax-payers have no further tax liability if dividends are re-invested in dividend shares and held for 3 years.
- Employees must keep their Dividend Shares in the Plan for 3 years after which they can take them out free of Tax and NIC.
Key Features of Free Shares
- Companies can give each employee Free Shares up to the value of £3,000 each year free of Income Tax and National Insurance.
- Free share awards can be linked to performance or be a flat award to each employee.
- Eligibility to join the SIP can be up to a maximum period of 18 months.
- Employees must hold the shares in the SIP for a minimum of 3 years.
- Employees who leave the company through resignation or dismissal within the first 3 years of receiving the awarded shares could forfeit these shares under the rules of their Plan.