Share Incentive Plans

How does a Share Incentive Plan work?

Employers encourage employees to save by offering them the opportunity to buy shares in the business through deductions from pre-tax salary. Employees decide how many shares they can buy (subject to statutory limits), and employers can award additional matching shares if they choose to.

SIP employee selection criteria

A SIP must generally be available to all qualifying employees on the same terms, so it is typically adopted by larger companies that can bear the administration costs. Employers can make free share awards conditional upon employees’ performance, provided the relevant statutory requirements are met.

Employee buys free shares

Employers can award employees up to £3,600 worth of free shares per tax year. Employees can also buy up to £1,800 worth of partnership shares per tax year, or 10% of their salary if lower. Employers can match partnership shares with up to two matching shares for each partnership share purchased.

Partnership shares are purchased using deductions from the employee’s pre-tax salary. Employees can make regular deductions or, where permitted by the plan, use a lump sum such as a bonus.

The shares are held in a SIP trust for the employee’s benefit.

Dividends from SIP shares

Employees may receive dividends on free, partnership and matching shares. If the plan allows, these dividends can be reinvested in further dividend shares. Special tax rules apply to dividend shares, including a requirement to hold them in the plan for at least three years to obtain the relevant Income Tax exemption.

Selling SIP shares

SIP shares are held in a trust. Free and matching shares must normally remain in the plan for a period of between three and five years, as specified in the plan rules. Partnership shares can be withdrawn at any time, although withdrawing shares before the relevant qualifying period has elapsed may trigger Income Tax and National Insurance contributions.

When an employee leaves employment, their shares will generally need to be withdrawn from the plan, subject to the applicable rules and any relevant exceptions. The tax treatment depends on the circumstances and how long the shares have been held.

The plan rules govern how shares are dealt with when an employee leaves and whether they can be sold or transferred.

Corporate law requirements to run a SIP

To qualify for favourable tax treatment, the plan must meet the statutory requirements, including the following:

The company must be:

• A qualifying company under the SIP legislation, which may include a listed company or an unlisted company meeting the relevant independence or group-company requirements.

The shares must be:

• Ordinary;
• Fully paid up;
• Non-redeemable; a
• Held through a qualifying SIP trust.

The employees must be:

• Employees and not consultants;
• Meet any qualifying service requirement permitted under the legislation.

Employees working overseas may also be eligible, depending on the circumstances.

• All qualifying employees who have completed any applicable qualifying period must be invited to participate in the SIP on the required terms.
• Performance criteria can be imposed where permitted, but the plan must comply with the statutory rules governing eligibility and awards.
• The SIP cannot be operated solely for the benefit of highly paid employees.
• No prior HMRC approval is required to run a SIP. However, the company must notify HMRC and self-certify that the plan meets the statutory requirements within the applicable time limit.

Employee Benefit Trust

The employer establishes a SIP trust to hold shares for participating employees and administer awards and withdrawals. The trust can facilitate the acquisition and holding of shares while employees participate in the plan. Setting up and administering the trust can be expensive, although qualifying establishment and running costs may be deductible for corporation tax purposes.

Taxation under a Share Incentive Plan scheme

Under a SIP, employers and employees may benefit from tax advantages, provided the relevant requirements are met.

Employers

By offering a SIP, employers may save on National Insurance contributions that would otherwise arise on equivalent remuneration, depending on the type of shares and how long they remain in the plan.

Employers may also claim corporation tax relief for qualifying costs associated with the plan, including relevant share costs and administration expenses, subject to the applicable rules.

Employees

Free and matching shares are generally not subject to Income Tax or National Insurance contributions when awarded under a qualifying SIP. Partnership shares are purchased from pre-tax salary. Tax and National Insurance may arise when shares are withdrawn before the relevant qualifying period has elapsed.

Generally, keeping free, partnership and matching shares in the plan for five years provides full Income Tax and National Insurance advantages. Dividend shares generally need to remain in the plan for three years to qualify for the relevant Income Tax exemption. Capital Gains Tax may still apply in some circumstances, depending on when and how the shares are sold.

Share Incentive Plan practical points

A successful SIP will consider the following key points.

• Choice of EBT trustees - A SIP must be operated through a qualifying trust. Professional trustees may be appointed, or suitable internal trustees may be considered, subject to the trust’s requirements. The cost and administrative responsibilities should be assessed before choosing an arrangement.
• Using restricted shares in a SIP - Employers can impose restrictions and forfeiture provisions on shares where permitted by the statutory rules and the plan documents. SIP shares cannot be repurchased for less than the employees paid for them.
• SIP reporting - Employers must file an annual return with HMRC by 6 July following the end of the tax year and meet the applicable registration and reporting requirements.

Solutions for companies which do not qualify for a SIP

Private companies have a range of options for rewarding employees with shares. Many private companies consider the Enterprise Management Incentives (EMI) scheme first, as it can be flexible and tax-efficient for qualifying companies and employees. Other schemes, including the Company Share Option Plan (CSOP), may also be appropriate.

Companies that do not qualify for a SIP may be eligible to operate a Save As You Earn (SAYE) option scheme, subject to the relevant requirements.

HMRC statistics indicate that SIP adoption is relatively modest. The administrative burden means that SIPs are often more suitable for larger companies with substantial workforces.