A HMRC Share Incentive Plan (SIP) aims to provide benefits to employees in the nature of shares in the company they work for

What does it do?

The SIP allows all employees to build up a personal stake in the company they work for over a period of time as a result of either buying shares from their gross salary, or as a result of being given shares free of charge and free of tax and national insurance contributions.

Who is it for?

Most independent companies will qualify to operate a SIP. The SIP is an ‘all employee’ share scheme and as such all employees of the company that has established the scheme must be eligible to participate in the plan.

It is possible to impose a qualifying period of up to 18 months employment before an employee becomes eligible to participate. Employees decide whether they wish to accept the invitation to participate.

How does it work?

  • A SIP comprises a trust deed and rules (model deed and rules can be supplied by HMRC) and is managed by Trustees.
  • The Trustees acquire shares in the company that has established the scheme. The Trustees are normally ‘gifted’ or loaned funds by the establishing company in order to acquire shares. These shares might be acquired from existing shareholders, or as a result of the company allotting new shares which are subsequently subscribed for by the SIP.
  • The shares used must be ordinary shares, although non-voting shares are permitted.
  • Acquired shares are then held by Trustees on behalf of employees who will participate in the plan.
  • The SIP Trustee and Company agree what types of award will then be made.

What types of award can the SIP make?

There are four main types of SIP awards that can be used to get shares into the hands of qualifying employees:

  • Free shares – employees can be gifted £3600 worth of shares each tax year without suffering tax and NIC on the value at the time of the award.
  • Partnership shares – eligible employees may authorise deductions to be made out of their gross salary (that is before tax and NIC) of up to £1800 (or 10% of salary whichever is lower) to be used to acquire partnership shares;
  • Matching shares – Trustees and the principle company can give matching shares at a ratio of up to 2 Matching shares for each 1 Partnership share bought by the employee;
  • Dividend shares – dividends from the shares already held by the employee within the SIP can be reinvested to buy further shares in the company each tax year.

Shares are normally held in trust for at least 3 years, but more often for 5 years as this provides more tax effectiveness. After five years, the entire value of the shares is free of tax.

If an employee leaves voluntarily (or is sacked with good cause) within 3 years of an award of shares the company can require that any Free or Matching shares be forfeited.

If any employee leaves voluntarily (or is sacked with good cause) within 3 years of purchasing Partnership shares they will incur tax and national insurance contributions.

Is it expensive to operate the SIP after installation?

Not in most circumstances. As the SIP is designed by HMRC there is a lot of information available relating to how the plan must be operated and what information is required to be reported to HMRC annually.

Most companies will be able to operate a SIP without the need for outside help and thus costs should be limited.

Any benefits to the company?

The company can benefit in a number of ways. The company will be entitled to a corporation tax deduction for the cost of establishing and operating the plan.

The company doesn’t have to pay employer’s National Insurance contributions on any pay used by employees to buy Partnership Shares so long as they are then left in trust for the full five years – saving the company up to £128 for every £1,000 invested by employees.

Why should we choose it?

Choose the SIP if you want employees to own shares rather than have an ‘option’ to acquires shares in the future. Whilst shares may need to be held in the plan for a number of years there are clear tax savings for both the employee and company regardless of whether shares are gifted or purchased.

Does this create immediate ownership?

Yes. The tangible nature of shares means that employees have clear ownership in the business from the moment they become a shareholder. The shares held in the SIP are allocated to specific employees even though they are held in a trust.

How can we help?

If you are exploring employee share schemes, we can help you to identify the most appropriate scheme to suit your objectives. We have a track record of establishing schemes and explaining the benefits to employees. We are happy to meet at client’s offices, or at our London office, without charge or future obligation. Please contact us for an initial discussion.