Share Incentive Plan – flexible tax free shares for your employees
When business owners come to us to ask about share plans, the first port of call is almost always the ever popular Enterprise Management Incentives (EMI) option plan.
EMI is very flexible and tax efficient and will work for many smaller companies. But there is an even more tax efficient share plan, the Share Incentive Plan (SIP) which can really help all of your employees feel like owners, and which is much less well known.
The SIP is the only share plan in the UK that can deliver a zero tax rate. The plan enables employees to be given shares in their own business without any income tax or NICs arising, and when they sell their shares they will usually not pay any capital gains tax on their gains.
This makes the SIP the most tax efficient share plan in the UK, and an attractive and low risk way for your staff to own shares in their business.
The SIP is very flexible so you can offer shares to employees in various different ways:
- Employees can buy shares with a value of up to £1,800 each year out of pre-tax salary, ie before income tax and National Insurance Contributions are charged.
- You can also offer a “BOGOF” arrangement. In fact, for each share an employee buys, you can give them up to two further shares, known as matching shares.
- Finally, you can also give employees free shares – up to £3,600 worth of shares per employee each year.
You can pick and choose which approach is best for you and your business. Many companies offer a BOGOF arrangement, to encourage buy-in from employees.
You don’t need to offer shares every year – and you don’t need to use the same approach every year either. Some companies change their offer regularly, depending on their requirements.
Need to know
There are a few key points you should know about before you go ahead with a SIP:
- The SIP must be offered to all employees (though you can set a qualifying period), and you need to offer the shares on a fair basis. That doesn’t mean everyone has to get the same number of shares – for example, if you are just giving away free shares, you can award these on the basis of hours worked/length of service/remuneration.
- The SIP is a long term plan. The full tax benefits only apply once shares have been held for at least 5 years.
- You’ll need a trust set up to hold the shares on behalf of the employees – employees don’t hold shares directly. They can still get dividends on their shares, though.
Is a SIP right for me?
You might consider using a SIP if:
- You want all of your employees to benefit from share ownership, including the ability to use dividend payments as a way of profit sharing
- You want employees to make a financial investment in the company to encourage their commitment to the business
- You want a share plan that will tie in your employees in the long term
- You are considering starting a transition to wider employee ownership but you don’t want to give up control of your company
RM2 Partnership has a wealth of experience in designing, establishing and operating SIP plans for our private company and listed clients, including operating the SIP trust and managing all the administration of the plans. If you’d like to find out how a SIP can work for you and your employees, contact us on firstname.lastname@example.org to arrange a call with one of our expert advisers.