A SIP, Share Incentive Plan, gives all employees the opportunity to purchase shares in their employer’s company. The scheme encourages employees to regularly save. SIP shares offer tax benefits.

How does SIP work

Employers encourage employees to save by offering them a choice to buy shares in the business. Employees decide how many shares they can buy (subject to statutory limits) and employers can top up the shareholding with matching shares if they choose to.

SIP employee selection criteria

SIP scheme must be offered to all employees on equal terms so it is typically adopted by large companies who can bear the SIP administration costs. Employers can make share awards conditional upon employees’ performance.

Employee buys free shares

Employees buys up to £3,600 worth of free shares per year (free shares). The Employers can also offer the employees up to £1,800 worth (or 10% of pay) of partnership shares on top of free shares (partnership shares). Employers can match the partnership shares (matching shares) with some free shares to further incentivise the employee. There is a limit on how many matching shares the employee can receive.

The shares are purchased from the employee’s pre-tax salary. The employee can make monthly savings or pay for shares in one lump sum, e.g. a bonus.

The shares are held in an Employment Benefit Trust (EBT).

Dividends from SIP shares

Employee receives dividends from free shares, partnership shares and matching shares. These can be in the form of cash or reinvested in further dividend shares. There are special tax rules relating to dividend shares.

Selling SIP shares

SIP shares are held in an EBT. Free shares will normally need to be held by at least three years as set out in the Plan Rules. Partnership shares can be withdrawn from EBT at any time (the tax advantages are then lost unless the shares have been held for a qualifying period).

SIP shares are sold back to the EBT when the employee:

  • Resigns;
  • Is dismissed;
  • Dies.

The price at which they will be sold will depend on the Plan Rules but partnership shares will be usually bought at the lower of their market value or price paid by the employee.

Explaining company’s requirements to run a SIP

To qualify for favourable tax treatment the following requirements must be met:

  • The company must be:
    • Listed on a recognised stock exchange; or
    • Unlisted company that is under the control of a listed company; or
    • Unlisted company that is not under the control of another company.
  • The shares must be:
    • Ordinary; and
    • Fully paid up; and
    • Non-redeemable;
    • Held in a UK resident SIP trust.
  • The employees must be:
    • Employees and not consultants; and
    • Have a qualifying period of employment; and
    • Resident in the UK. Employees from abroad may be invited to a SIP.
  • All qualifying employees who have completed a qualifying period of service must be invited to the SIP. Performance criteria can be imposed but they need to cover the whole workforce.
  • The SIP cannot be operated for the benefit of highly paid employees only.
  • No prior HMRC approval is required to run a SIP.

Employee Benefit Trust

The employer sets up an Employee Benefit Trust (EBT) which holds SIP shares and provides a market for the shares to be traded when employees join and leave. EBTs are expensive to set up and run but some of the set up and administration costs can be deducted by the employer.

Taxation under a SIP scheme

Under SIP employers and employees save tax.

Employers

By offering SIP employers save on national insurance contributions (NICs) which would have otherwise been payable on equivalent salary payments.

Employer can claim a corporation tax deduction for any costs of the free and partnership shares incurred by the EBT trustee. SIP set up and running costs are also deductible.

Employees

Awards of shares are not usually subject to tax but SIP share sales or withdrawals can be taxable, depending on the circumstances. If the employee keeps his shares in a SIP for at least 5 years he can sell them tax free. Dividend shares can be sold tax free after three years.

SIP practical points

A successful SIP will consider the following key points.

Choice of EBT trustees

SIP has to be run via a UK resident EBT. This is the most expensive part of operating a SIP. The trustees can be either professional trustees chosen from a range of professional providers or scouted internally from the workforce which is cheaper.

Using restricted shares in a SIP

Employers can impose restrictions and forfeiture provisions on the shares in SIP provided that they comply with statutory requirements. SIP shares cannot be repurchased for less than the employees paid for them.

SIP reporting

Employers need to file an annual return to HMRC by 6 July following the end of a tax year.

Solutions for companies which do not qualify for a SIP

Private companies have a wealth of choice when gifting shares to employees. Most private companies usually consider the Enterprise Management Incentives (EMI) Scheme as the first port of call when they want to offer shares to employees as they are the most flexible and very tax efficient.  Other schemes may be appropriate for private companies as well (CSOP).

Companies which do not qualify for a SIP (for whatever reason) may be eligible for SAYE option scheme.

SIP:Recent experience

Our SIP expertise includes:

  • Advising a large gardening supplies retailer on their eligibility for a SIP;
  • Confirming compliance with the SIP legislation for a vet supplier for the purposes of self-certification for HMRC;
  • Drafting tax advice for the purposes of employee communication for a shoe manufacturer.

HMRC statistics show Share Incentive Plan adoption is modest. Only larger companies, with a substantial workforce, find a Share Incentive Plan appropriate. The administrative burden is sizeable. 

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