Share Incentive Plans (SIPs) are a cornerstone of UK employee share ownership, offering a tax-advantaged and inclusive way for companies to reward and motivate their workforce with shares. They are commonly operated by listed companies, but can be used by private companies.
What is a Share Incentive Plan (SIP)?
A Share Incentive Plan (SIP) is a government-approved, all-employee share scheme designed to allow companies to offer shares to their employees in a tax-efficient manner.
Introduced in 2000, SIPs have become increasingly popular among UK businesses as a means to align employee interests with those of shareholders, enhance engagement, and provide a tangible stake in the company's success.
SIPs can be tailored to suit the objectives of the company within a statutory framework and can be used by both listed and private companies, but are more commonly implemented by listed companies due to the liquidity generally inherent in listed company shares.
The shares awarded under a SIP are held in a trust on behalf of employees, and the plan must be offered to all eligible UK employees on the same or similar terms.
Key features and structure of SIPs
SIPs are modular in design, allowing employers to choose from four main types of share awards. These can be used inpidually or in combination, and the mix can be adjusted from year to year:
- Free Shares: Employers may award up to
£3,600 worth of free shares to each employee per tax year.
These must be offered on similar terms to all eligible employees,
though allocation can be varied based on objective criteria such as
remuneration, length of service, or performance. Free shares are
typically subject to a holding period of three to five years,
during which they must remain in the SIP trust to secure full tax
advantages.
- Partnership Shares: Employees can purchase
partnership shares using deductions from their pre-tax salary, up
to £1,800 per year or 10% of salary (whichever is lower).
These shares can be bought monthly or accumulated over a period of
up to 12 months. The use of pre-tax salary means employees benefit
from immediate income tax and National Insurance Contributions
(NIC) savings.
- Matching Shares: To further incentivise
participation, employers may offer up to two matching shares for
each partnership share purchased by an employee. Matching shares
are awarded free of charge and must generally be held in the SIP
trust for at least three years, with full tax relief available
after five years.
- pidend Shares: Employees who receive pidends on their SIP shares may be allowed or required to reinvest those pidends in further shares, known as pidend shares. There is no statutory limit on the value of pidend shares, and they must be held in the SIP trust for at least three years to benefit from full tax relief.
All shares used in a SIP must be ordinary shares that are fully paid up and not redeemable. They may be non-voting, and companies can use a special class of shares for the SIP if desired.
Eligibility and participation
SIPs are designed as all-employee schemes. This means that all UK-resident employees of the company (or nominated group companies) must be invited to participate on the same or broadly similar terms. Employers may impose a minimum qualifying period of service, not exceeding 18 months, before employees become eligible.
The inclusive nature of SIPs is a key differentiator from discretionary share schemes, ensuring that the benefits of share ownership are available across the workforce, not just to senior management or select groups.
How SIPs work in practice
When a SIP is established, a UK-based employee trust is set up to acquire and hold shares on behalf of participating employees. The trust is administered by independent trustees, who are responsible for maintaining records, communicating with participants, and ensuring compliance with HMRC requirements.
Shares awarded or purchased under the SIP are held in the trust for a minimum period, typically three to five years, to secure the full range of tax benefits. If an employee leaves the company, their shares must be withdrawn from the SIP, and the tax treatment will depend on the circumstances of their departure, the type of shares and the length of time the shares have been held.
Tax treatment of SIPs
One of the key attractions of SIPs is their favourable tax treatment for both employees and employers. The tax rules vary depending on the type of shares and the timing of withdrawal from the SIP trust.
For employees:
- Acquisition: No income tax or NIC is payable
when employees acquire free, partnership, or matching shares
through a SIP, provided the shares are held in the trust for the
required period.
- Withdrawal within three years: If shares are
withdrawn from the SIP trust within three years of acquisition
(other than for certain "good leaver" reasons such as
death, injury, disability, redundancy, retirement, or TUPE
transfer), income tax and NIC are due on the market value of the
shares at the date of withdrawal.
- Withdrawal between three and five years: If
shares are withdrawn between three and five years, income tax and
NIC are payable on the lower of the market value at acquisition and
the market value at withdrawal (for free and matching shares), or
on the lower of the salary used to buy the shares and the market
value at withdrawal (for partnership shares).
- Withdrawal after five years: No income tax or
NIC is payable if shares are withdrawn after five years.
- pidend shares: pidend shares are tax-free if held in the SIP for at least three years. If withdrawn earlier, income tax is payable on the amount of the cash pidend used to acquire the shares, subject to the annual pidend allowance.
While shares are held in the SIP trust, any increase in value is free from CGT. If shares are withdrawn and not sold immediately, CGT may be payable on any subsequent gain, subject to the inpidual's annual CGT allowance. Employees may transfer up to £20,000 of SIP shares per year into an ISA within 90 days of withdrawal to shelter future gains from CGT.
For employers:
As employees purchase partnership shares from pre-tax salary, employers save on their own NIC liabilities. Employers are also entitled to corporation tax relief on:
- The salary used to purchase partnership shares
- The market value of free and matching shares when acquired by the trust
- The costs of setting up and administering the SIP
Setting up a SIP: legal and administrative considerations
Implementing a SIP involves several legal and administrative steps, including:
- The company must prepare a trust deed, SIP rules, and any
necessary agreements for the different types of share awards. Legal
advice is essential to ensure compliance with the statutory SIP
code.
- Depending on the company's Articles of Association and any
shareholders' agreements, shareholder approval may be required
to establish a SIP, particularly if the plan could result in
dilution of existing shareholdings. Listed companies on the Main
Market typically require shareholder consent, while AIM-listed
companies may not.
- A trustee (often a professional body) must be appointed to
administer the SIP trust, maintain records, and liaise with HMRC
and participants.
- The SIP must be registered with HMRC via the Government Gateway
portal by 6 July following the end of the tax year in which the
plan is established. The company must certify that the plan meets
all qualifying requirements.
- Annual returns must be filed with HMRC, and the company must ensure ongoing compliance with SIP rules, including the management of joiners and leavers, communication with participants, and record-keeping.
Advantages and disadvantages of SIPs
Some key advantages of SIPs include:
- SIPs foster a sense of ownership and alignment with company performance, which can boost motivation, productivity, and retention.
- Both employees and employers benefit from significant tax advantages, including income tax, NIC, and CGT reliefs.
- Employers can tailor the mix of free, partnership, matching, and pidend shares to suit their objectives and budget.
- SIPs must be offered to all eligible employees, promoting fairness and inclusivity.
- The costs of setting up and running the SIP, as well as the value of shares awarded, are deductible for corporation tax purposes.
Disadvantages may include:
- SIPs are more complex and expensive to set up and administer than simple cash bonuses or salary increases. Professional legal and administrative support is usually required.
- Employees bear the risk of share price fluctuations. If the company's value falls, employees may see the value of their shares decrease.
- Employees must generally hold shares in the SIP trust for up to five years to secure full tax benefits, which may be a deterrent for those seeking more immediate rewards.
- Issuing new shares for a SIP can dilute existing shareholders' interests, which may require careful management and communication.
Conclusion
With careful implementation and maintenance, SIPs can be an effective mechanism for companies to share success with their employees and foster a culture of ownership. Legal advice and professional administration are strongly recommended to ensure the plan is set up and operated in accordance with the law and best practice, and to ensure the available tax advantages can be secured.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
