The right share scheme for your business can improve employee commitment and motivation, which in turn can enhance company performance and growth.
A Share Incentive Plan (SIP) may be an appropriate vehicle for larger employers looking to involve their whole workforce in share participation.
What is a SIP?
A SIP is an HM Revenue & Customs (HMRC) approved plan under which all UK resident employees must be eligible to participate. A SIP creates immediate employee shareholders, whose risks and rewards of share ownership match those experienced by other shareholders.
The plan is operated through a UK resident trust. The trust buys shares that can subsequently be awarded to employees in the following ways:
- Employers can give £3,600 worth of free shares per tax year to each employee.
- Employees can buy ‘partnership shares’ from pre-tax salary up to a value of £1,800 per year or 10% of their income for that tax year, whichever is lower.
- Employers may also offer employees up to two free ‘matching shares’ for each partnership share bought.
- In addition, dividends paid on any of these shares can be paid as ‘dividend shares’ instead of as cash (up to a maximum of £1,800 per annum), in which case they will not be subject to income tax.
The tax and National Insurance treatment depends on the period the shares are kept in the plan (summarised in a table in the PDF below). If the shares are kept in the plan for five years no income tax or National Insurance is payable.
- Very tax efficient for the employee. As well as income tax and National Insurance savings on acquisition, there may be no capital gains tax payable by the employee if shares remain in the SIP trust until the point of sale. There is also an employer National Insurance saving on salary used to acquire partnership shares.
- The employing company should be able to claim a deduction against corporation tax for the market value of free and matching shares provided, as well as the costs of implementing and administering the plan.
- Awards of free shares can be linked to achievement of performance conditions, which can be company-wide or specific to a business unit.
- Encourages long-term employee participation in the business and alignment of employee and corporate interests, particularly where employees invest their own money in buying partnership shares.
- All eligible employees must be invited to participate and must do so on essentially the same terms, which can limit the ability to vary awards based on performance. The SIP only allows for up to £10,800 of shares to be allocated to any employee in a tax year.
- Costs of administration and implementation may be prohibitive for smaller employers and will need to include the ongoing maintenance and funding of the trust.
Most suitable for
- Larger employers and those seeking to align the interests of all employees with corporate objectives over the medium/long-term.
- As employees are able to acquire partnership shares from pre-tax salary and be awarded free shares without income tax applying, there can still be significant value for participating employees even where the share value does not increase substantially over the holding period.
This factsheet is based on law and HMRC practice at 1 October 2019.