Auto-enrolment funding headache means FDs of larger companies look again at SIP!

Posted by admin at 15:51 on 13 Feb 2017


In a recent survey, many companies said that preparing for auto-enrolment is their biggest objective. RM2  do not advise on pensions but we note that many FDs now appreciate that the payroll savings from a Share Incentive Plan can help mitigate the additional payroll pension costs ahead. Here's how...

In a recent survey by Aon Hewitt nearly 40% of respondents said preparing for auto-enrolment is their biggest objective over the next 12 months. Certainly our experience working with larger employers is that the additional payroll costs of the new pension requirements is a great concern for FDs. HR and payroll are also feeling the strain in terms of additional administration compliance and wondering if employees will actually appreciate the benefits.

Funding the additional staff pension provisions is very challenging for many businesses and cash-flow impact is a key concern at the forefront of many a FD's mind. So, as FDs look for cost savings and HR wonder how to manage staff communications and incentivisation and reward we step in with a solution – the Share Incentive Plan!

There can be no denying that cash cost and tax considerations play a part in any staff benefits provision and that if you ask someone what rate of tax they want to pay, in an ideal world, they will answer "None!". Ask an FD and they'll answer "None and I want lots of savings and reliefs and for any cost of provision to be more than offset by the savings obtained". This holy grail of benefits provision, zero tax charge on acquisition of the benefit by an employee and keeping that tax free into the future, is achievable using a Share Incentive Plan (SIP) and good on-going share plan administration. High participation rates can also mean savings for the employer company that more than meet the cash-flow, P&L and corporate tax relief objectives concerning the FD and which can, potentially, help plug the funding gap between current and future payroll costs, taking into account the new cash-drain of auto-enrolment contributions.

Below we explain how the SIP works and the savings potential achievable. The larger the employer and the more engaged staff are with the future growth opportunities, the bigger the savings will be.

The SIP Award

Under a SIP (which is an all-employee rather than a discretionary plan) employees may be offered shares in a number of ways. The Company can opt for one or more of a combination of the transfer methods.

Each year, employees can receive up to £3,000 worth of 'Free' shares in the Company. The shares are appropriated to each eligible employee and held on their behalf within a statutory employee share ownership (SIP) trust.

Employees can also be offered the opportunity to purchase 'Partnership Shares' paid for out of gross or pre-tax income before deduction of tax and NICs, subject to a maximum investment of £1,500 per year.

If the employees take up the offer to purchase shares, the company may then offer additional free 'Matching Shares' to a maximum ratio of 2:1 i.e. a further £3,000 worth of shares per annum.

Finally, employees can receive shares in lieu of cash dividends as 'Dividend Shares'.

A grand total of over £7,500 worth of shares may therefore be offered to each employee per tax year.

Tax implications - Good news!

If the shares remain within the trust for 3 years, no income tax or National Insurance Contributions (NICs) for either employer or employee are payable on any gain in value.  However, if the shares remain in trust for 5 years, no income tax or NICs of any description is payable on the value, including the initial value.  As the offer of shares can be made annually, significant amounts of potentially tax-free value can be transferred to employees in this way.

Company Advantages - More good news!

Under the SIP legislation, the company will enjoy Corporation Tax relief when the shares are appropriated to the employees (i.e. when the shares are placed in trust on behalf of the employees).  The employees in turn receive share appropriation certificates.  At this stage, the company will receive the tax advantage on the value of shares passed into the trust.

In respect of the 'Partnership' shares, the employees can elect to save amounts of up to £125 per month or £1,500 per annum from pre-tax salary. No income tax, employer or employee NIC liabilities are charged on these amounts.  The NIC savings to employers can therefore be significant depending on the participation rates. For FD's looking at "salary sacrifice" arrangements this ticks a lot of boxes. Just imagine - a saving of 13.8% x £1,500 each year for each employee in a large company. Of course not every employee might be minded to accept the Partnership share offer. It is after-all asking them to sacrifice salary and make a discretionary spend from their pay to buy shares in their employer. This is why investing in a thorough employee communications programme is important. Better communication equals higher take-up and participation and this in turn drives the higher payroll savings...

Through a SIP, employees can enjoy the opportunity to receive significant share incentive arrangements through a combination of tax-efficient transfer methods, but what about after the shares have reached the 5 year maturity date?

SIP maturity - Yet more good news!

Under the terms of a SIP, shares that have been held in the Plan for 5 or more years may be released without any liability to income tax or national insurance contributions. The 5 year point is from the original date of purchase. Therefore, if a Plan participant purchased Partnership Shares on 1st May 2009, these shares will reach the 5 year anniversary on 2nd May 2014 and can then be released.  If an employee purchased shares on a monthly basis, each set of Partnership Shares may be released as and when each 5 year anniversary of the date of purchase is reached.

Once the 5 year anniversary is reached, the income tax and NIC savings that were received when the employee's original salary deduction was contributed to the Plan, will no longer be subject to claw back.  Also, under the SIP legislation, for as long as the shares remain in the Plan, the employee will not have to pay any capital gains tax (CGT).

After the 5 year anniversary, the employee also has the option to continue to receive the favourable CGT treatment mentioned above by transferring shares into a Self Invested Personal Pension Plan (SIPP) or a Stocks and Shares ISA (ISA). To take advantage of this option, once shares have been requested to be released from a SIP, they must be transferred into a SIPP or ISA within 90 days of the date of release.  The transfer of shares from a SIP into a SIPP also attracts income tax relief. This means that it is possible for the shares to be ported into an investment wrapper environment, so that future share growth remains protected from tax levy.

We conclude, as more and more FDs are doing, that a Share Incentive Plan ticks a lot of boxes for tax efficient provision of non-cash benefits to staff with salary sacrifice payroll cost savings thrown in. The costs of engaging RM2 to establish the plan are tax deductible, fixed fee and payable over installments. The on-going plan administration can also be outsourced to RM2 (so no need to further burden in-house HR and payroll departments).

If you would like to find out more about how a SIP might benefit your company please contact Liz Hunter at RM2 on 020 8949 5522 or email

The RM2 Partnership Ltd is not authorised to provide any advice in relation to auto-enrolment but does implement and administer SIP plans. We have regularly spoken alongside authorised financial advisors about the use of SIPs as part of a wider employee benefits strategy, including pension provision, for larger employers.