A zero tax employee share plan
Zero tax on an employee share plan, the Share Incentive Plan ("SIP") sounds too good to be true. Even the Enterprise Management Incentive ("EMI") only delivers a 10% capital gains tax rate to participants – and that’s after employees have paid something to exercise their options.
ZERO Income Tax
The SIP is the only way that a UK company can deliver shares to its employees without them paying a penny for the shares and without them paying any income tax on the gift of shares. (It also lets employees buy shares out of pre-tax salary – and for each share they buy they can get a further two shares, free, and without any income tax.)
ZERO National Insurance Contributions
The shares aren’t only free of income tax – they’re also free of NICs. That’s a saving for the Company as well.
ZERO Capital Gains Tax
It’s also the only way that employees can sell their shares without paying a penny in capital gains tax.
And if you’re a company owner, there are even extra tax breaks for you if you sell some of your shares into the SIP.
You’ll need to follow some rules to get those tax breaks but these are definitely not insurmountable!
The key points are:
- The plan must be offered to all employees
- A trust needs to be set up to hold the shares on behalf of the employees
- Usually (but not always!), shares have to be held for 5 years before the full tax advantages kick in
- You’ll need to agree a valuation for your shares when you make awards
We’re big fans of the SIP at RM2 – it’s a great way to share ownership more widely among employees. The big advantage of a trust is that you don’t have to worry about direct share ownership by employees, and in particular if employees leave, the trust can always buy their shares back – much easier than dealing with a company buyback of shares. And, even though the employees don’t own their shares directly, they can still get dividends on their shares.
If you’re looking to put in a tax advantaged share plan that will benefit all your employees, SIP could be the plan for you.