Out-Law Guide | 03 Aug 2011 | 11:19 am | 5 min. read
Share Incentive Plans or SIPs (formerly known as Approved Employee Share Ownership Plans or AESOPs) were introduced in 2000 as a means of encouraging employees at all levels to acquire shares in their employer company. SIPs must be open to all employees who are subject to UK tax on employment income. The partnership shares element detailed below can be used to replicate US Stock Purchase Plans.
Outline of SIPs
From tax year 2014/15, under a SIP, employees may be offered up to £3,600 of free shares each year free of income tax and National Insurance contributions (NICs), and may buy up to £1,800 of "partnership shares" each year from their pre-tax salary. As employers may give up to two additional matching shares for each partnership share an employee buys, the maximum possible combined entitlement in any tax year under a SIP is £9,000.
Employees who keep their shares in the plan for five years pay no income tax, NICs or capital gains tax (CGT) on either the initial value or any subsequent increase in value of the shares up to the time they are taken out of the plan. If shares are taken out of the plan between three and five years, an employee pays income tax and NICs only on the market value of the shares when they were awarded (or, in the case of partnership shares, the amount of salary deducted) or the then market value of the shares at the date they are withdrawn, whichever is lower. If the shares are withdrawn from the plan before three years has passed, income tax and NICs are charged on the market value of the shares at that time.
An employee will not suffer income tax and NICs if his shares are withdrawn in specified “good leaver” or “company event”circumstances,or the shares are forfeited.
No tax is payable on dividends that are then reinvested into further shares, subject to limits.
An SIP is an all-employee scheme, and must therefore be offered to all employees on the same terms. A period of qualifying employment of up to 18 months may be possible.
The company will obtain a tax deduction for the costs of setting up and running a SIP, and for the market value of free and matching shares used. The company's NIC treatment follows the employee's, depending on when the shares are removed from the plan.
The plan itself uses a trust structure. An employee trust will purchase, or subscribe for, the shares to be used for the purposes of the plan, and will hold the shares on behalf of participants.
Each employee can receive up to £3,600 of free shares a year. These may be given to all employees on the same terms, for instance dependent on remuneration, length or service or hours worked; or may be linked to individual, team, divisional or corporate performance subject to safeguards to maintain this overall same terms principle.
The plan must provide for a holding period of between three and five years when free shares cannot be withdrawn from the plan unless the employee leaves, and may provide that free shares will be forfeited in circumstances set out in the plan rules and/or in ancillary documentation. Regardless, shares must be withdrawn from the plan if the employee leaves the company.
If the employee leaves the company within three years after the shares are acquired, the employee will be obliged to pay income tax (and possibly NICs) on the market value of the shares at the date of leaving, unless that employee leaves for specified “good leaver” or “company event“ reasons, or theshares are forfeited under the rules of the plan. An employee who leaves between three and five years after the shares are acquired will have to pay income tax on the market value of the shares when they were awarded and their market value at the exit date - whichever is less, again unless that employee leaves for specified "good leaver" or "company event" reasons or the shares are fortified under the rules of the plan.
No CGT is charged when the shares are withdrawn from a SIP, or while the shares are in the plan. If the shares are not sold immediately on withdrawal, CGT will be charged on any increase in value after withdrawal. The plan may allow dividends on plan shares to be reinvested tax free, within limits.
The employer can invite potential participants to agree with the employer to allocate part of their pre-tax salary to buying shares, with a limit of £1,800 a year or 10% of the employee's salary – whichever is less. The plan may provide for deductions to be either accumulated for up to 12 months then used to buy shares, or to be immediately invested following each deduction from the participant's monthly pay.
Pay used to buy shares will still be counted as salary for pension purposes, although participants must be warned about possible loss of National Insurance benefits. As participants use their own money to purchase shares upfront, there is a degree of investment risk involved through exposure to share price movements. However, the overall financial exposure is reduced as the shares are purchased out of pre-tax salary.
Partnership shares may be withdrawn from the plan at any time, but if this happens within three years of investing, income tax and NICs are charged on the value of the shares at that time. If the shares are withdrawn between three and five years into the plan, income tax and NICs are chargeable on the amount of salary used to buy shares or, if less, the market value of the shares at the exit date. After five years, shares may be withdrawn without any income tax or NICs being chargeable.
Leavers' shares must be withdrawn from the plan. An employee will not suffer income tax and NICs on withdrawal if he leaves for specified “good leaver” or “company event“ reasons.
Up to two matching shares may be provided free to employees for each partnership share they have bought. Matching shares have the same holding period as free shares and maybe forfeited in the circumstances set out in the plan rules and/or inancillary documentation or withdraws the corresponding partnership shares from the plan within 3 years.
The tax treatment of matching shares is the same as for free shares.
The plan may provide that an employee must sell his partnership shares(and/or dividend shares) in specified circumstances for the price paid for the shares or if lower, the market value at the time they are offered for sale by the employee. If the shares are sold, income tax and NICs are payable by reference to the consideration received.
Options must be notified electronically to HMRC and the company will be required to certify that the requirements of the relevant taxlegislation are met in relation to the plan. As the administration of the plan can be complex, many companies engage professional administrators.
Shares awarded under a SIP must be fully-paid and not redeemable by the company. They may be non-voting shares. It is possible to have a special class of shares for employees.
The shares must be listed under a SIP, the employer company must be listed on a stock exchange, or the company must not be under the control of another company. Shares of a subsidiary of a listed company may be used, provided that company is not "close" (generally, a small company with no more than five controlling parties) for tax purposes.
A listed company must obtain shareholder approval before establishing a SIP, unless the plan will relate only to existing shares purchased in the market. Unlisted companies will need to obtain shareholder approval in certain circumstances, for example if the company will need to amend its articles of association to allow employees to sell shares.
Other HMRC tax-advantaged plans
Sharesave/Save As You Earn (SAYE) plans are the other current form of HMRC tax-advantaged all-employee share plans. For more information, see our separate OUT-LAW guide.
HMRC tax-advantaged discretionary share option plans are also sometimes offered by companies to all employees.
SIPs are more flexible than SAYE plans. However, they involve a significant amount of administration, which is potentially costly.