Buyer’s guide to share incentive plans

KEY FACTS

What are share incentive plans?
A Sip is a tax-advantaged savings vehicle open to all employees. Intended to encourage wider share ownership in the UK, it entitles employees who take part in a scheme to purchase or receive free company shares without paying tax or national insurance as long as the shares are held for five years. Employees have the option of buying partnership shares up to £1,500 or 10% of their salary (whichever is lower), which can be matched up to a maximum of two free shares in return by their employer. Employers can also give free shares to a maximum value of £3,000 in any tax year. Any dividends paid out on Sips may be used to buy additional shares up to an annual limit of £1,500.

Where can employers get more information?
HM Revenue and Customs’ (HMRC) Share incentive plans: guidance for employers and advisers is available here. HMRC’s share schemes team helpline can be contacted on: 0115 974 1250 IFS Proshare’s Employee Share Ownership Helpline can be reached at: 020 7444 7104

The main providers include:
Capita Share Plan Services, Computershare Investor Services, Equiniti, Killik Employee Share Services, RM2, Yorkshire Building Society.

Share incentive plans can provide a profitable savings vehicle for employees while helping their employers to boost engagement and increase productivity, says Scott Beagrie

Inviting staff to become shareholders in their employer is a win-win situation. It gives staff a regular investment vehicle, with the potential for consistent growth, and helps to make them more committed and motivated workers.
John Collison, head of industry body IFS Proshare, says: “Evidence suggests employee share ownership increases productivity and employer advocacy. If employees are committed to their employer and have a stake in the company, they are more likely to play an active role.”

Share incentive plans (Sips) were introduced under the Finance Act 2000 to encourage wider share ownership. According to IFS Proshare’s latest annual survey, published last month, more than 900,000 staff took part in a Sip in 2010, investing an average of £73 a month.

Sips are one of four HM Revenue and Custom-approved share plans, alongside sharesave schemes, company option share plans and enterprise management incentives.

With Sips, there are four types of plan: employers can issue each employee with up to £3,000 in free shares a year, free of income tax and national insurance (NI); employees can purchase up to £1,500 worth of partnership shares a year from their pre-tax and pre-NI salary; and employers can give up to two matching shares for each partnership share bought. Employers can also enable staff to re-invest any dividends paid out on Sip shares up to an annual limit of £1,500.

Employers can offer all or a combination of these options to suit their business needs. For example, a plan does not have to include matching shares and could also allow for dividend shares to be paid out and reinvested.

Employees must hold the shares for a minimum of five years and, if they sell immediately after this period, they realise a Sip’s tax and NI break. Staff can gain further tax relief by transferring their shares into a self-invested personal pension (Sipp) or an individual savings account (Isa).

Subject to tax

Iain Wilson, client relationship director at Computershare, says:“One important facet of a Sip that companies need to appreciate is that after five years and one month of participation, employees are only able to sell the first month’s shares free of tax. Any sales of shares acquired less than five years ago may be subject to tax and may lead to a forfeiture of matched shares.”

With Sips, an employee is buying actual shares on a monthly basis, whereas under sharesave, they have the option of taking the accumulated cash with a tax-free bonus and interest after the stipulated three-, five- or seven-year savings period, or to buy the shares at a discount. Consequently, there is greater risk with Sips because the value of †shares can go down as well as up, andemployers have a responsibility to communicate this.

Providers are wary of detailing set up and administration costs, but Wilson says Sip administration tends to be outsourced.

Read more buyer’s guides