Buyer’s guide to share incentive plans 2014

The Finance Act 2014 introduced several changes to share incentive plans (Sips) for both employers and employees.

The act, which received Royal Assent on 17 July 2014, increased the maximum value of shares that an employee can acquire with tax advantages through Sips by £300 a year to £1,800 for partnership shares and £3,600 a year for free shares, from 6 April 2014.

The act also introduced changes to the way Sips must be administered, with employers being required to register all new and existing share scheme participants online.

In addition, the act introduced the requirement for employers to self-certify any new approved schemes, rather than having to gain approval from HM Revenue and Customs (HMRC).

One million employees in Sips

The number of employees taking part in Sips reached one million in 2013, up 4% from the previous year, according to IFS ProShare’s 2014 Share incentive plan (Sip) and SAYE [sharesave] employee share plan survey, published in July 2014.

The value of the average employee’s Sip holding increased to £7,028.57 in 2013, up from £6,131.88 in 2012.

Sips include four types of scheme, and were set up by the government in 2000 to encourage employee share ownership.

Free shares given to employees are exempt from income tax and national insurance (NI), while partnership shares are paid for from an employee’s pre-tax  salary.

Employers can also give staff up to two matching shares for every partnership share they buy, and dividend shares enable employees to buy more shares with the dividends they gain from free, partnership or matching shares

Shares are purchased by the plan administrator within 30 days of the end of the accumulation period. The main advantage of a Sip for employers 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 take an interest in the organisation’s performance. The employee also has an opportunity to become a shareholder in the business.

Employers can offer all, or a combination of, the four 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.

Tax-free status

If employees keep their free shares 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 However, if the shares are withdrawn before three years have elapsed, income tax and NI will be due on the value of the shares at the time of removal. Removal of shares after three to five years results in income tax and NI being payable on the  award (purchase) price or the price at the time of withdrawal, whichever is lower.

Any employee that leaves the organisation for a ‘good’ reason (retirement or redundancy, for example) will have no tax liability when removing shares, irrespective of how long they have held them. If the shares are held in the plan for a minimum of three years, no income tax or NI is payable on the investment.