Share incentive Plans
Written by Ray Coman
Share incentive Plans (SIPs) are trusts created by an employee to acquire shares in their employer’s company. SIPs allow employees to obtain shares whilst avoiding income tax, National Insurance Contributions (NICs) and Capital Gains Tax, in the following four ways:
- Free shares. A company can give shares to an employee with a value of up to £3,600 per tax year. The award of these shares can be performance related.
- Partnership shares. An employee can purchase shares with a value of up to £1,800 a year (or 10% of earnings if lower.) The cost of the shares is deducted from gross taxable pay. The amount of partnership shares is not dependent on the number of free shares awarded.
- Matching shares. An employer can give two free shares for every partnership share bought.
- Dividend shares. As the shares pay dividends, an employee can reinvest up to £1,500 a year into purchasing new shares in the plan. Dividends which are reinvested are not treated as taxable income.
Conditions
The opportunity to participate in the scheme must be open to all employees, whether part time or full time. The company can restrict participation to employees who have served a minimum period of employment, provided this is 18 month or less. To participate, an employee cannot hold an interest of 25% or more in the company.
Tax implications
There is no income tax or NIC charge when the shares are acquired.
- If held in the plan for less than three years, free, partnership or matching shares are treated as taxable income. The market value of the shares when taken out of the plan are treated as earnings for income tax purposes. If dividend shares are taken out within three years, the dividend used to acquire the shares is treated as a dividend paid on the date that the shares leave the plan.
- If held in the plan for more than three years but less than five years, the lower of the value when acquired and the value when removed from the plan, is assessed to income tax and national insurance. This does not apply to dividend shares, which are tax exempt after three years.
- If held in the plan for more than five years, there is no income tax or NIC payable when the shares are removed. This applies to employees who hold the shares for a shorter period but leave due to retirement or redundancy.
The value for capital gains tax purposes is the same as the value of the shares when removed from the SIP. There is no capital gains tax if shares are transferred into an ISA within 90 days of when the shares are taken out of the plan. This exemption is subject to the ISA investment limit.
The market value of free and matching shares and the other costs of administering the scheme is deducted from profits for corporation tax purposes.
The tax regulations on Share Incentive Plans are detailed in Schedule 2 of the Income Tax (Earnings and Pensions) Act 2003
