The Finance Act 2014 introduced several changes to share incentive plans (Sips) for both employers and employees.
What are Sips and how do they work?
Share incentive plans (Sips) are a tax-efficient savings vehicle for employees, who can receive up to £3,600 worth of free shares a year, free of income tax and national insurance. If the shares are kept in the plan for at least five years, 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 at http://www.hmrc.gov.uk/
HMRC’s share schemes team helpline is on 0300 123 1079.
IFS ProShare’s employee share ownership helpline is on 020 7444 7104.
Who are some of the main providers?
Capita Asset Services, Computershare Investor Services, Barclays, RM2, Yorkshire Building Society and Equiniti, which bought competitor Killik Employee Services in October 2013.
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.
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.
£983.01 – The weighted average value of free shares given to individual employees in 2013
820 – The number of employers that offer Sips to all employees
194% – The increase in the 2013 market value of free shares compared with 2012