What are Sips and how do they work?
Share incentive plans (Sips) were introduced by the UK government in 2000 as a tax-efficient savings vehicle for employees. They can include four types of shares: free shares, partnership shares, matching shares and dividend shares. Employers can give each employee up to £3,000 worth of free shares each year, free of income tax and national insurance. If the shares are kept in the plan for five years or more, they retain their tax-free status.
Where can employers get more information?
HM Revenue and Customs’ Share incentive plans: guidance for employers and advisers is available online at http://www.hmrc.gov.uk/
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?
Capita Share Plan Services, Computershare Investor Services, Equiniti, Killik Employee Share Services, RM2, Yorkshire Building Society
960,988 employees signed up to a Sip in 2012.
£83.37 is the average monthly investment employees make in a Sip
£200 million worth of free shares were given to UK employees in 2011
Source: IFS ProShare
The number of employees taking part in Sips rose by 6% from 908,905 in 2011 to 960,988 in 2012, according to IFS ProShare’s SAYE (sharesave) and share incentive plan survey 2013, published in July.
The survey also found that employees are saving more in Sips, with the average monthly investment now standing at £83.37, up from £71.86 in 2011. The number of sharesave (also known as SAYE) accounts stood at just over 1.2 million in 2012.
Sips encompass four different types of scheme, including free shares, partnership shares, matching shares and dividend shares. They were set up by the government in 2000 to encourage employee share ownership.
Shares are purchased within 30 days of the end of the accumulation period by the plan administrator and are free of income tax and national insurance (NI). The main advantage of a Sip for an employer is improved staff retention and motivation. The longer an employee stays with their employer, the more they can benefit from the tax advantages of a Sip and they will probably be more likely to show an interest in the organisation’s performance. The employee also has opportunity to become a shareholder in the business.
Employers can offer all, or a combination of, the share options, according to their business requirements. For example, they do not have to offer free or matching shares if it does not make economic sense to do so.
If free shares are kept in the plan for five years or more, they will retain their tax-free status. However, if the shares are withdrawn before three years have elapsed, income tax and NI will be due on the value of the shares at the time of their removal. Removal of shares between three and five years results in income tax and NI being payable on the lower of the award (purchase) price and the price at the time of withdrawal.
Any employee that leaves the organisation for a ‘good’ reason (retirement or redundancy, for example) will not have any tax liability when removing shares, irrespective of how long they have held them.
However, there have been a number of changes to Sips since the 2013 Finance Bill was implemented in July. Previously, employees could use up to £1,500 a year or 10% of their gross pay, whichever was lower, to buy partnership shares. The £1,500 limit has now been removed, and there is no limit to the value of dividend reinvestment in a tax year.
On the basis that the shares are held in the plan for a minimum of three years, there will be no income tax or NI to be paid on that investment.
The revised guidelines have also simplified retirement provisions. Previous legislation set out retirement by reference to an employee’s age, but this age varied depending on which plan he or she was signed up to. This had led to the use of the term ‘early retirement’ where a participant had retired but had not yet reached a specified age. Under the new provisions, the plan rules will no longer mention a specific age.