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A share incentive plan is one of the two UK employee share schemes introduced in 2000, aimed at providing employers with an easy and flexible way to offer shares in the company to their employees.
This scheme has gained traction among UK companies with the number of companies offering SIP schemes to employees increasing. In this post, we’ll cover:
A share incentive plan (SIP) works by awarding eligible employees free shares and/or allowing them to purchase shares in their company. The shares are kept in a trust until the employee either leaves the job or decides to take the shares from the plan.
Employees can be offered one or a combination of the following four share awards:
Although these four SIP share types have different definitions, their tax consequences are similar. See the breakdowns below:
The tax situations of matching shares are the same as the free shares.
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Partnership and Matching Shares are another consideration, and these align more with shareholders because participants use their own salary to buy partnership shares, from pre-tax pay and the company can choose to match these, similar to giving free shares. The company can manage costs on matching shares by using different ratios from buy one get two free, to buy 10 get one free, the other option is to cap the matching at a lower amount, match say only the first £50 with a one for one.
You’ll get corporation tax relief for launching and operating the scheme, including:
Also, there will be no employer’s NIC or Apprenticeship Levy charges for you to pay.
Employees can be more motivated to work towards the company’s goals as their investment is based upon the performance of the company.
SIP is an effective scheme to reward employees beyond their salaries. If the company succeeds and its value continues to grow, an employee could receive greater financial benefits from share awards than cash bonuses.
But, young employees tend to change jobs every 2.4 years according to the research from ProShares. So, they may be reluctant to tie themselves down to a financial investment for five years.
As discussed, your share awards could potentially bring your employees substantial financial wealth. If they are given free shares, they usually will earn under any circumstances even if the shares drop because they have paid nothing for them in the first place.
The SIP tax benefit is one of the most attractive benefits to employees. As discussed, no income tax or NIC is chargeable when employees acquire the shares and take them from the plan after five years from the date of acquisition.
Also, capital gain tax is not chargeable on the increase in value of the shares whilst the shares remain in the SIP trust.
If your employees purchase Partnership Shares, the salary deductions come from pre-tax earnings, meaning they do not have to pay income tax or national insurance on the pay used to purchase the shares.
But, an SIP does involve risks. They cannot choose to take their savings pot back like is possible in the SAYE scheme at the end of the term, even if the market value of the share goes below the value at the time of purchase when the scheme ends.
If an employee is considered a good leaver, they’ll receive full tax benefits – no income tax and NICs on withdrawal of the shares from the SIP at any time. Good reasons to leave include:
If the business is taken over and the employees are offered cash for their shares, this is also often a good reason to withdraw them.
All UK-resident employees of nominated group companies must be eligible to participate in a SIP. However, subject to certain conditions, the company can set a minimum service period of up to 18 months for new entrants.
After checking your company’s eligibility, you can then set up the plan by preparing a trust deed, a set of rules for the SIP, and certain other documents such as a partnership share agreement and free share agreement.
Next, you will need to register via the HMRC’s Online Service Portal. The plan should be registered by 6 July in the year following you set up the plan. In the meantime, you can appoint a trustee to administer your trust.
Share incentive plan administration is a continuous process where you will manage every change in personnel – joiners and leavers, adjust plan design details, track enrolment and a lot more.
Whether you’re looking to upgrade your existing plan administration or looking for a solution to administer your brand new plan, we’re happy to help you find the right solution.
Here at Global Shares, a JP Morgan company, we know how to guide companies looking to launch their own SIP or any type of employee share scheme because we’ve helped so many to do it – let us help you bring out the best in your plan.
Request a free demo and see what our software and support can do for you.
A share incentive plan (SIP) is a tax-advantaged all-employee share scheme introduced in the UK, allowing employees to own shares in the company.
A SIP works by awarding eligible employees free shares and/or allowing them to purchase shares in their company. The shares are kept in a trust until they either leave the job or decide to take the shares from the plan.
There are four types of share awards: #1. Free shares #2. Partnership shares #3. Matching shares #4. Dividend shares
When employees acquire the shares, no income tax or NICs is chargeable. When they take shares from their plan after 5 years from the date of acquisition, no income tax or NICs is chargeable. But if they take shares less than 5 years, they will be obliged to pay income tax and NIC.
For employers, SIPs provide generous corporation tax benefits, help retain and attract talent and improve productivity.
For employees, SIPs provide financial rewards, offer tax benefits and can help to reduce their tax burden.
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Please Note: This publication contains general information only and Global Shares is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. The Global Shares Academy is not a substitute for professional advice and should not be used as such. Global Shares does not assume any liability for reliance on the information provided herein.
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Global Shares is a trading name of Global Shares Ireland Limited (“Global Shares Ireland”), a company registered in Ireland, registration number 412396 with its registered office at Unit 2, Building D, West Cork Technology Park, Clonakilty, Co, Cork, Ireland which provides share plan administration services and software. Global Shares Inc. (“Global Shares US”) is incorporated in Delaware and provides share plan administration services and software to certain U.S. Companies.
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Global Shares Trustees Ireland Limited, Global Shares Trustees (UK) Limited, and Global Shares Trustees Company Limited (collectively, the “Trust Companies”), are Irish and UK trust companies that provide limited trust services for corporate share plans.
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