RM2 > Employee Share Schemes > Share Incentive Plan (SIP)

Share Incentive Plan (SIP)

WHAT IS A SIP?

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.

HOW DOES A SIP WORK?

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:

  • Employees can receive up to £3,600 worth of ‘Free’ shares in the Company each tax year. No tax is payable at the date of award.
  • Employees can purchase shares in the Company, known as ‘Partnership Shares’, worth up to £1,800 per tax year. Employees pay for the shares out of gross income, i.e. before the deduction of income tax and National Insurance contributions.
  • The Company may also offer free ‘Matching Shares’ to employees who have purchased Partnership Shares, up to a maximum of two Matching Shares for each Partnership Share purchase (equal to a total of £3,600 worth of Matching Shares per tax year).  

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.

  • Once an award has been made, the SIP Trustees hold the shares on behalf of employees until an employee wishes to release their shares.
  • The SIP Trustees will be legally bound to act in the interest of employees.

WHAT ARE THE BENEFITS OF A SIP?

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.

Employee tax position when shares are released

If shares are withdrawn from the SIP trust:

  • Within 3 years –income tax and National Insurance Contributions will be due on the market value at the date of release.
  • After 3 years -income tax and National Insurance Contributions will be due on the lower of the market value at the date of release and the market value at the date of the original award.
  • After 5 years – no income tax or National Insurance Contributions will be due.

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.

Performance conditions for a SIP

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.

Does my company qualify for a SIP

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.

What are the limitations of a SIP?

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:

  • Partnership Shares - £1,800
  • Matching Shares - £3,600 
  • Free Shares - £3,600
  • Total - £9,000

How much does a SIP cost?

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 enquiries@rm2.co.uk.