What is a SIP and who uses them?
A Share Incentive Plan (SIP) is an all-employee tax-advantaged share plan, which cannot be restricted to particular groups of staff or specific individuals. It is designed to be flexible, insofar as employers can reward specific performance.
These Schemes are typically operated by Medium & Large-Sized companies often ones that are floated on an exchange, with a ready list price for the shares. This is not a prerequisite and it is important for Small companies to carefully consider the valuation model to be used to value their shares, which will be called upon at each point an award or purchase of shares is made.
Shares acquired under the plan must be held in a UK resident trust to ensure independent legal ownership.
Types of Shares under SIP
Free Shares – Employers can give employees up to £3,600 of shares per year free of tax and national insurance.
Partnership Shares – Employees can buy up to £1,800 of shares out of their pre-tax and pre-NIC salary .
Matching Shares – Employers can award free shares in respect of the number of partnership shares up to a maximum of £3,600.
Dividend Shares – Shares acquired with the dividends paid on SIP shares, up to £1,800 of dividends may be reinvested tax-free each year.
Shares must leave the plan when the employees leave their job. The company can decide whether employees lose their free shares if they leave within 3 years.
The company will obtain corporation tax relief for the costs they incur in providing shares and for the market value of the free and any matching shares given to the employee.
The company must offer all employees the opportunity to participate in the plan whether they work full or part-time (although a minimum period of employment can be specified before an employee can qualify – this cannot exceed 18 months).
Employees who keep their shares in a plan for 5 years pay no income tax or national insurance on those shares and there will be no capital gains tax whist they remain in the plan.
Employees who take their shares out of the plan after 3 years will pay income tax and national insurance on only the initial value of those shares – any increase in the value of their shares while in the plan will be free of income tax and national insurance.
Employees who keep their shares in the plan until they are sold will have no capital gains tax to pay on sale. If they take the shares out and sell them later then there will only be a charge to capital gains tax on any increase in the value of the shares after they have been taken out of the plan.
If a Share Incentive Plan Scheme sounds of interest to your business then please do not hesitate to contact our Tax Director, Phil Kinzett-Evans, to discuss it in more detail.