Buyer’s guide to share incentive plans

Focus on facts

What are share incentive plans?
A share incentive plan (Sip) is a tax advantaged savings vehicle introduced by the government in 2000 to encourage employee share ownership. Four types of shares can be used in a Sip: free shares, partnership shares, matching shares and dividend shares. Employers can give each employee up to £3,000 worth of free shares. Staff can use up to £1,500 a year or 10% of their gross pay, whichever is lower, to buy partnership shares, and employers can provide two matching shares for each partnership share staff buy. They can also use up to £1,500 worth of dividends from their shares each year to buy further shares, known as dividend shares.

Where can employers get more information?
HM Revenue and Customs’ Share incentive plans: guidance for employers and advisers is available here.
HMRC’s share schemes team helpline is on 0115 974 1250.
IFS ProShare’s employee share ownership helpline is on 020 7444 7104.

Who are some of the main providers in the market?
Capita Share Plan Services, Computershare Investor Services, Equiniti, Killik Employee Share Services, RM2, Yorkshire Building Society.

Share incentive plans can breed employee loyalty and encourage workplace saving, but the tax liabilities are complex and must be fully understood, says Rebecca Patton

Share incentive plans (Sips) are a low-cost way to boost employee engagement by inviting staff to become shareholders in their organisation, and provide a useful workplace savings vehicle.

The government introduced Sips under the Finance Act 2000 to encourage share ownership. According to IFS ProShare’s Saye (sharesave) and share incentive plan survey 2011, published in July 2012, 908,905 employees took part in a Sip in 2011, investing an average of £71 a month.

A Sip is one of four types of share plan approved by HM Revenue and Customs (HMRC), alongside sharesave schemes, company option share plans and enterprise management incentives.

Four types of share can be used in a Sip: free shares, partnership shares, matching shares and dividend shares.
Employers can give each employee free shares worth up to £3,000. According to IFS ProShare, free shares worth more than £200 million were given to UK employees in 2011.

Employees can use up to £1,500 a year or 10% of their gross pay, whichever is lower, to buy partnership shares, and employers can give up to two matching shares for each partnership share staff buy. Employees can also use up to £1,500 worth of dividends from their shares each year to buy further shares, known as dividend shares.

Employers can offer all or a combination of these share options, according to their business needs. For example, they do not have to offer free or matching shares if it does not make economic sense to do so.

Employees are exempt from paying income tax and national insurance (NI) contributions on Sip shares as long as the shares remain in the Sip for a minimum of five years.

Tax liability

The tax liability for shares withdrawn from a plan within the first five years varies. If free or matching shares are held for less than three years, income tax is based on the market value of the shares when they cease to be subject to the plan. But if the shares are held for at least three years but less than five years, income tax is based on the lesser of the market value at the date of award and on ceasing to be subject to the plan.

For partnership shares held for less than three years, income tax is based on their market value on ceasing to be subject to the plan. For those held for more than three years but less than five years, tax is based on the lesser of the partnership money used to buy the shares and the market value of the shares at the date they cease to be subject to the plan.

Shares sold after the initial five-year vesting period are subject to capital gains tax, but employees can mitigate this by rolling their shares into a self-invested personal pension (Sipp) or an individual savings account (Isa).
The government is currently consulting on allowing employers to self-certify their share schemes to reduce the administrative burden of dealing with HMRC. It currently takes up to eight weeks for HMRC to approve a Sip scheme.

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