Share Incentive Plan (SIP) Guide 2023

Starting a Share Incentive Plan (SIP): everything you need to know

In this week’s newsletter, Dragon Argent continues our series looking at how to motivate employees with share option schemes. This week we focus on SIPs - Share Incentive Plans. 

What is a Share Incentive Plan (SIP)?

A SIP also provides a tax efficient way for employees to acquire shares but unlike other schemes this is done using an Employee Benefit Trust which holds the shares on the employee’s behalf.

There are 3 different types of awards that can be made under a SIP and a company is free to choose which they offer:

1. Partnership Shares

  • These are purchased through deductions from the employee’s pre-tax salary.

  • The amount of total deductions that can be made per tax year is capped at the lower of £1,800 or 10% of earnings.

  • The company can set an accumulation period meaning that money to purchase the share must be accumulated for a certain amount of time before it is used to acquire the shares.

2. Matching Shares

  • Where partnership shares are being acquired the company can choose to gift the employee up to two free matching shares for each partnership share.

3. Free Shares

  • As the name would suggest, these are shares that are given to employees without payment, but they may be linked to performance targets.

  • The amount of free shares that a company can give to an employee in any tax year is capped at an initial value of £3,6000.

What are the advantage and disadvantages of a Share Incentive Plan (SIP)?

In addition, companies also have the option of allowing employees to use dividends from shares acquired under the SIP to buy further shares to be held under the SIP.


ADVANTAGES


Tax advantaged scheme which means that as long as the scheme remains a 'Schedule 3 SAYE option scheme':

✔️ Employee benefits

(a) no income tax and NICs are payable if the shares are left in the SIP for 5 years (3 years for dividend shares) or if the shares are removed for good leaver reasons;

(b) if an employee leaves their shares in the SIP until they are sold, no Capital Gains Tax will need to be paid when they are sold;

(c) the deductions from salary are free from income tax and NICs;

✔️ Company benefits

if all relevant criteria are met, the company can make use of a corporate tax deduction covering the cost of setting up the SIP, contributions to the expenses of the trustees, the market value of the free and matching shares at the time they are acquired by the trustee and any additional costs in relation to providing partnership shares

✔️ Relatively flexible and the company is able to decide which parts of SIP it implements and the level of awards but still heavily governed by legislation as to how it can operate so grants cannot be as bespoke as EMI schemes


DISADVANTAGES


❌ The company must be a qualifying company

❌ The scheme must be offered to all eligible employees

❌ Complex and costly set up

❌ Requires a Trust to be set up and maintained

❌ There are minimum holding periods before which the options cannot be exercised generally 3 or 5 years depending on the type of shares granted to be eligible for the tax advantages

❌ If partnership shares are used, this can affect the employee’s benefit and tax credit eligibility

❌ Self-certification to HMRC is required

❌ Employer cannot pass on NICs to the employee who is granted the option

❌ Registration of the scheme as well as annual filings are required within strict time limits

❌ A valuation will need to be carried out by the company and agreed with HMRC prior to making any grants


Share Incentive Plan (SIP) Are Best Used When:

✔️ all employees are to be given the chance to be included in the scheme

✔️ there are a lot of employees to justify the costs of scheme set up

✔️ the company is prepared to pay significant costs up front to establish the Trust and the scheme and ongoing costs to administer it

✔️ employees are comfortable waiting for 3 -5 years before they dispose of their shares

HMRC Approval

HMRC does not need to approve a SIP plan. It is the employers responsibility to setup a SIP, typically with the support of an experienced advisor, to meet all the necessary conditions and to notify HMRC once the setup is completed. Also, the employer must self-certify by 6 July following the tax year in which shares are first awarded to or bought by employees that the business meets all the necessary conditions.

Other HMRC Tax-advantaged Plans

Below you can find other type of HMRC tax-advantaged plans available for employees:

For any questions you may have setting up a Share Incentive Plan (SIP) scheme contact us by scheduling a discovery call with one of our experts and we will be happy to help you.

Disclaimer: the guidance contained in this article is not a substitute for legal advice. Before implementing any option scheme, you should seek appropriate advice from a qualified legal professional.

Book a call with our Corporate & Commercial Law Solicitor today ↓

 

Relevant guide to Employee Share Option Schemes:

  • Watch our recorded EMI webinar:

    A roundtable discussion and Q&A on what an Enterprise Management Incentives (EMI) Scheme is, what its benefits are, and how it can be used to incentivise key employees in a tax-efficient way.

  • How does a Company Share Option Plan (CSOP) Work

    A Company Share Option Plan (CSOP) is a tax-advantaged, discretionary share option plan where a company can grant CSOP options to any employee or full-time director. Learn more.

  • A Guide to Issuing Shares to Employees

    One of the most common challenges that early-stage businesses face is how best to recruit and incentivise talent at a time when funds are tight. One tool that founders reach for when trying to supplement salary is the offer of equity in the business. Learn more.

 

Author

Freddie-Nicolle Brace

Head of Corporate & Commercial

Email - freddie-nicolle.brace@dragonargent.com

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