What is a share incentive plan?
Share incentive plans (Sips) were created in 2000 as an employee share plan that could help staff save in a tax-efficient way. Employees can purchase shares or be awarded free shares.
Sips have tax advantages. The monetary contributions come from an employee’s pre-tax salary, meaning that staff do not have to pay income tax or national insurance (NI) on their share purchase, with employers also saving on NI contributions.
Where can employers get more information?
Sips are governed by HM Revenue and Customs (HMRC), so organisations will be able to find out more information at www.gov.uk/government/organisations/hm-revenue-customs.
Who are the main providers?
These include: Barclays Wealth, Capita Asset Services, Computershare, Equiniti, The RM2 Partnership, The Share Centre, Xerox and YBS Share Plans.
Share incentive plans, or Sips, are a form of employee share plan that allows eligible staff to buy shares in the organisation that they work for from their pre-tax earnings. This means that employees can purchase shares at a more advantageous rate. They do not have to pay income tax or national insurance contributions (NICs) on the shares because the funds are taken direct from salary before tax.
There are four main variations of a Sip. One is partnership shares, whereby an employee will buy shares using money from their gross salary. Although partnership shares offer flexibility in terms of how much an employee may wish to contribute and if they want to adjust this amount during the year, there are some guidelines to adhere to. Employees can contribute a maximum of £1,800 a year towards partnership shares, or 10% of their salary, whichever is the smaller amount. This can be paid in either a lump sum or a monthly contribution.
Partnership shares often work in conjunction with matching shares. This is where the employer awards a certain number of matching shares for every partnership share that an employee purchases. An organisation can give a maximum of two free shares for every one partnership share, although Proshare’s SAYE and Sip annual survey results, published in May 2016, found that 23% of organisations prefer to offer one matching share for every partnership share bought.
The Proshare research also found that 27% of organisations offer free shares to staff. These are shares that are given away to employees, often linked to performance targets. Participants can be awarded up to £3,600 worth of free shares each year.
The fourth type of Sip is dividend shares. Dividends gained from partnership, matching or free shares can be reinvested as dividend shares.
Employers can decide which Sip option they wish to implement, or which combination would best suit their organisation.
To implement a share incentive plan, an employer will need to liaise with independent providers and bodies. It will need to hire an administrator to look after the general running and administration of the plan, as well as organise a trust for the scheme. Some larger administration organisations will already have relationships with trustees or even their own separate trustee business.
Originally formed in 2000, very little has changed in terms of how the Sip is structured and delivered. To remain tax free, the shares have to sit in trust between three to five years depending on the individual plan. This also ensures the shares are exempt from capital gains tax, which will be applied if the shares are taken out of the plan early, as well as NICs.
Tweaks to Sips include the increase of contribution levels, which occurred in 2014, taking potential payments from £125 to £150 per month. One recent piece of legislation that may impact Sips is the Market Abuse Regulation (MAR), which came into effect in July 2016. This tackles insider dealing and market manipulation to combat financial crimes. These regulations will only affect organisations that deal with a trading venue.
As financial wellbeing becomes an increasingly prominent issue in the workplace, finding tax-efficient ways to help staff save is a useful avenue to explore.
- 74% of organisations offer a share incentive plan (Source: Proshare’s SAYE and Sip annual survey results, May 2016)
- £89 is the weighted average monthly investment made to Sips in 2015 (Source: Proshare’s SAYE and Sip annual survey results, May 2016)