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Share Incentive Plan (SIP) Guide 2022

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Share Incentive schemes, SIPS shares and how they work cover book

What is a Share Incentive Plan (SIP)?

A share incentive plan (SIP) is one of the two all-employee UK tax-advantaged share plans introduced in 2000, providing employers with an easy and flexible way to offer shares in the company to their employees.

74% of organisations offer a share incentive plan
(Source: Proshare’s SAYE and SIP annual survey results, May 2016)


In this post, we’ll cover:

  • How does a share incentive plan work?
  • SIP tax rules
  • Are share incentive plans worth it for employers?
  • Are share incentive plans worth it for employees?
  • Things to consider for share incentive plans
  • FAQs
If you know SIPs well and want to know how to best design and administer your own SIP, talk to us today.

How does a share incentive plan work?

A share incentive plan works by keeping the shares awarded in a trust for employees until they either leave the job or decide to take the shares from the plan.

If you, as an employer, decide to set up a SIP, you can choose to offer your employees one or a combination of 4 ways to get the share:

  1. Free shares
  2. Partnership shares
  3. Matching shares
  4. Dividend shares

SIP tax rules

Although these 4 SIP share types have different definitions, their tax consequences are similar. Let’s see how the tax on share incentive plans works for these four types.

A. Free Shares:

You can annually give each employee free shares worth up to £3,600 (was £3,000 in 2001 but raised to £3,600 in 2013/14). All of your employees should either receive the same number of shares or should be allocated depending on remuneration, length of service or hours worked.

Unsurprisingly, this is the most popular choice taken up by more than 90% of employees. The average free share award per employee last year was just over £788.

Tax situations:

  1. Receive shares:
    When your employees acquire the shares, no income tax or NICs is chargeable on the value of the free shares
  2. Leave within 3 years after receiving shares:
    They will be obliged to pay income tax on the market value of the free shares at the exit date.
  3. Leave between 3 and 5 years after receiving shares:
    They will pay income tax on the lesser of
    – The market value of the free shares when they received;
    – The market value at the exit date.
  4. Leave for a specified ‘good leaver’ reason at any time:
    They will not pay income tax and NICs on withdrawal of the free shares from the SIP trust at any time.
  5. Leave after 5 years after receiving shares:
    No income tax or NICs is chargeable on the value of the free shares when they take shares from the plan after 5 years from the grant date.

B. Partnership Shares:

You can invite employees to buy partnership shares via deductions from salary pre-tax and NIC. They can use up to £1,800* or 10% of salary each year – whichever is less to buy shares.

*This amount was raised in 2013/14 as well. It was £1,500.

Tax situations:

  1. Receive shares:
    No income tax or NICs is chargeable on the money you spent to buy the partnership shares
  2. Leave within 3 years after receiving shares:
    They will be obliged to pay income tax and NIC on the market value of the partnership shares at the exit date.
  3. Leave between 3 and 5 years after receiving shares:
    They will pay income tax on the lesser of
    – The salary you used to buy the partnership shares;
    – The market value at the exit date.
  4. Leave for a specified ‘good leaver’ reason at any time:
    They will not pay income tax and NICs on withdrawal of the free shares from the SIP trust at any time.
  5. Leave after 5 years after receiving shares:
    No income tax or NICs is chargeable.

C. Matching Shares:

Where employees acquire partnership shares, you can give them further shares at a ratio of up to 2:1 for each share acquired, i.e. Up to 2 matching shares may be provided free for each partnership share they have bought.

Tax situations: The same as the Free Shares

You know what:
Partnership Shares often work in conjunction with Matching Shares. Setting both up in our software is straightforward with great flexibility. Request a demo now if you want to see how it works.

D. Dividend Shares:

Your employees as a shareholder may be paid dividends on their free/partnership/matching shares. If so, you may allow them to use those dividends to buy more shares. These are dividend shares. They can use up to £1,500 of plan dividends in this way in any tax year.

Tax situations:

  1. Receive shares:
    No income tax or NICs is chargeable on the dividends you used to buy the dividends shares.
  2. Leave within 3 years after receiving shares:
    They will be obliged to pay income tax on the amount of the cash dividend originally used to acquire the dividend shares, at the prevailing dividend rate at the exit date.
  3. Leave between 3 and 5 years after receiving shares:
    No income tax or NICs is chargeable
  4. Leave for a specified ‘good leaver’ reason at any time:
    They will not pay income tax and NICs on withdrawal of the free shares from the SIP trust at any time.
  5. Leave after 5 years after receiving shares:
    No income tax or NICs is chargeable.

Are share incentive plans worth it for employers?

Enjoy huge SIP tax benefits:

You’ll get corporation tax relief for launching and operating the share scheme, including:

  • Employees’ salary used to purchase partnership shares,
  • Together with any additional costs of providing those shares
  • The market value of the Free / Matching Shares when they were originally acquired by employees
  • Any costs related to establishing and running a SIP.

Also, there will be no employer’s NIC or Apprenticeship Levy charges you to pay.

Retain staff & attract talent:

SIP is an effective scheme for staff retention as we all want to reduce the tax burden. By staying in the company for at least 5 years, no income tax or NIC is chargeable on the shares. All the benefits we listed in the previous section would also help with hiring.

Improve productiveness:

Employees are more motivated to work as their investment is based upon the performance of the company

Are share incentive plans worth it for employees?

Enjoy huge SIP tax benefits:

The SIP tax benefit is one of the most attractive benefits to employees

As we can see from the tax situations above, no income tax or NIC is chargeable when shares are awarded to or acquired by participating employees. If the shares are held for at least five years, participants will receive tax benefits – no Income tax or national insurance (NIC) at exit.

Also, capital gain tax is not chargeable on the increase in value of the shares whilst the shares remain in the SIP trust.

Employees who take their shares out of the SIP trust within 5 years because they are leaving the company for a ‘good leaver’ reason will pay no income tax or NIC on their shares.

Reduce tax via pre-tax contributions:

If Partnership Shares are included in the SIP scheme, the deductions from participants’ salary come from their pre-tax earnings, meaning that staff do not have to pay income tax or national insurance on their share purchase as the funds are taken from salary before tax.

It reduces their income tax burden for the current year, especially for those in a higher-rate tax band.

Type
Tax Rate
Basic tax rate
20% on annual earnings above the PAYE tax threshold and up to £37,700
Higher tax rate
40% on annual earnings from £37,701 to £150,000
Additional tax rate
45% on annual earnings above £150,000
Income Tax in England and Northern Ireland (2022/2023)

Receive free shares or additional shares for share:

If you plan to offer your employees Free Shares as one of the SIP types or the only type, your employees basically will earn under any circumstances even if the shares drop because they pay nothing for them.

If you don’t want to offer free shares, Partnership and Matching Shares can be a SIP bundle for consideration. Although participants will need to use their own salary to buy partnership shares, some additional shares will be given to them for free if you offer matching shares at the same time.

But.. there're risks..

This is the main difference between a SIP and a Sharesave scheme – Share Incentive Plans do involve risk. Because the participants receive shares at the end of the plan, and cannot simply take their savings pot back.

However, as an employer, you need to communicate to participants that the salary comes from pre-tax earnings, the matching and free shares, and the dividends generally offset the risks, even if the share price has dropped.

Also, young employees tend to move to another company to gain promotions. The research from Proshare found that, on average, younger employees change jobs every 2.4 years. So, they may not want to tie themselves down to a financial investment for five years.

Things to consider for Share Incentive Plans

Share Incentive Plan good leaver definition

If you’re considered a good leaver, you’ll receive great tax benefits as we explained –  no income tax and NICs on withdrawal of the shares from the SIP at any time. Good reasons to leave include:

  • Injury
  • Death
  • Retirement
  • Redundancy
  • Disability
  • TUPE (transfer of undertakings)

If the business is taken over and the employees are offered cash for their shares, this is also a good reason to withdraw them.

Eligibility

All UK resident employees of nominated group companies must be eligible to participate in a SIP. However, subject to certain conditions, the company can set a minimum service period of up to 18 months.

Setup

After checking your eligibility, you can then set it up by preparing a trust deed, a set of rules for the SIP, and certain other documents such as a partnership share agreement and free share agreement.

Next, you will need to register via the HMRC’s Online Service Portal. The plan should be registered by 6 July 2022 if it was set up in 2021/22. After you’ve told HMRC, you’ll receive a scheme reference number within 7 days. You then need to log into their online services and ‘View schemes and arrangements’ to see your reference number. After that, annual filings are required.

In the meantime, you can appoint a trustee to administer your trust.

Administration

The plan administration will be one of the important factors to think about next. Share incentive plan administration is a continuous process where you will manage every change in personnel – joiners and leavers, adjust plan design details, track enrolment and a lot more.

Whether you’re looking to upgrade your existing plan administration or looking for a solution to administer your brand new plan, we’re happy to give you the best solution.

Here at Global Shares, we know the most important advice for companies looking to launch their own SIP or any type of employee share scheme because we’ve helped so many to do it – let us help you bring out the best in your plan.

Request a Free Demo and see what our award-winning equity compensation software and support can do for you.

FAQs about SIPs

What is a share incentive plan?

A share incentive plan (SIP) is a tax-advantaged all-employee share scheme introduced in the UK, allowing employees to own shares in the company. Since SIPs offer both employees and employers tax benefits and all UK resident employees must be eligible to participate, it’s called a tax-advantaged all-employee scheme.

How does a share incentive plan work?

A share incentive plan works by keeping the shares awarded in a trust for employees until they either leave the job or decide to take the shares from the plan. If you, as an employer, decide to set up a SIP, you can choose to offer your employees one or a combination of 4 ways to get the share: #1. Free shares #2. Partnership shares #3. Matching shares #4. Dividend shares

Are SIPs tax free?

When employees receive shares, no income tax or NICs is chargeable. When they leave the company after 5 years from the date of receiving the Free / Matching / Partnership shares, no income tax or NICs is chargeable. But if they leave the company less than 5 years, they’ll be obliged to pay income tax and NIC. Also, if you take the shares out, keep them and then sell them later, you might have to pay CGT if their value has increased. There’re other tax impacts on your shares under the share incentive plan when leaving the company. Click the link to read.

Are share incentive plans worth it?

Yes, it is. It allows employees and employers to enjoy huge tax benefits. For employers, SIPs are effective to improve staff productiveness and help to retain staff and attract talent.

Please Note: This publication contains general information only and Global Shares is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. The Global Shares Academy is not a substitute for professional advice and should not be used as such. Global Shares does not assume any liability for reliance on the information provided herein.

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