A Share Incentive Plan (SIP) is an HMRC approved share plan that must be offered to all eligible employees of a company, on broadly the same terms.
Under a SIP, shares are awarded to employees, which are then held on their behalf within a SIP Trust.
Shares can be awarded to employees under the terms of the SIP in one of a combination of ways:
A qualifying period of up to 18 months may be included within the SIP rules, but with a maximum of 6 months, if an Accumulation Period is to be used.
The Trustees of the SIP are chosen by the Company, and a corporate trustee may be used.
Under a SIP, as employees will become beneficial owners from the date of award, they may receive dividends, and vote their shares (if the shares used for the SIP have these rights), thereby enabling them to have a self-interest in enhancing productivity and increasing profitability. The Company may also include a provision whereby Free and Matching shares are forfeit if an employee leaves within three years of an award, to encourage retention.
If the company pays dividends, then it may include ‘Dividend Shares’ within the SIP rules, whereby dividends paid on SIP shares can be reinvested tax-free in the purchase of further shares in the company.
Under the SIP legislation, the company can enjoy Corporation Tax relief when Free or Matching Shares are awarded to the employees. The Corporation Tax relief will usually be equal to the value of the Shares when acquired by the SIP. In addition, Corporation Tax deductions are normally allowed for the setup costs and annual operating costs (such as professional advisor and trustee.)
In respect of the ‘Partnership’ shares, employees can elect to save amounts to buy the shares of up to £1,800 per tax year from gross salary. No income tax, employer or employee National Insurance Contributions (NICs) will be due in respect of these savings. In some cases, when employee participation rates are high, the employer National Insurance contribution savings can be significant, and these savings will remain long as the shares are held in the SIP for at least 5 years.
If shares are withdrawn from the SIP trust:
Whilst held in the SIP trust, the shares are exempt from capital gains tax. Therefore, if an employee releases shares from the SIP trust on or after the 5 year maturity date and sells these on the same day, they will be exempt from capital gains tax.
Under a SIP, it is possible to set conditions based on similar terms for each employee, (e.g. proportion of salary); however individual performance measures are not allowed.
Performance conditions may be used but, amongst other requirements, these must be fair and objective.
SIPs are available for UK private, public and listed companies. There are no size constraints or excluded trading activities but the plan must operate in the top company in a group with participation extended to employees in subsidiary companies.
In order to establish a SIP, a two stage approval process with HM Revenue and Customs is currently required. However, it is expected that the approval process will be streamlined in 2014/15.
As mentioned above, it is not possible to set individual performance conditions for participants of a SIP.
SIP awards must be offered to all eligible employees (including part-time employees and directors). A Company may however include a qualifying period of up to 18 months.
The maximum value that an employee may receive per tax year under the three main awards is as follows:
As well as establishment costs, there is also an on-going administration and trusteeship cost of running a SIP. The RM2 Partnership Limited and our corporate trustee company, RM2 Trustees Limited, have extensive experience of both administering and acting as corporate trustee for a large number of SIPs for both small and larger (including quoted and listed) companies.
We carefully consider your individual requirements and objectives before providing a quote. In our experience, it is necessary to scope out the complexity of work involved with each share plan in order to offer an accurate quote. The reason for this is that we typically operate on a fixed fee basis, which allows us to be up front with our clients about the total costs involved with the process from the start, instead of being a meter running arrangement.
We are proud to offer a tailored service, and do not believe in a one-size-fits-all approach.
If you would like a free consultation to discuss how a SIP may operate within your business, please contact RM2 directly on 020 8949 5522, or via firstname.lastname@example.org.