The Share Incentive Plan (SIP) was introduced in 2000. There are currently 960 plans in place costing the Government £300m in tax relief's (Source: HMRC June 2008)
An on-shore trust must be used to hold employees assets (cash/shares)
Companies are able to choose between a flexible combination of three modules:
Employees can buy shares from their pre-tax weekly or monthly salary subject to a limit of the lower of £1500 per annum or 10% of salary. Again, these shares are free of income tax and NICs. Alternatively, employees may invest £1,500 in a lump sum.
Employee contributions to partnership shares will not affect their ability to contribute to retirement benefit schemes, retirement annuity schemes and personal pension plans. In these cases, the ability and extent to which it is possible to contribute to pension schemes is determined by a set percentage of salary. In order to protect employees’ rights HMRC has stated that salary allocated to partnership shares will not limit payments for pension contribution purposes.
Employers can give employees up to two free shares for each partnership share the employee buys.
Employers can give up to £3,000 worth of free shares per annum to employees free of income tax and National Insurance (NICs). The legislation also provides two alternatives for awarding shares on the basis of performance (individual, team, divisional or corporate):
Companies must offer all employees whose remuneration is within Case 1 Schedule E the opportunity to participate in the plan whether they work full or part time. Companies can require employees to have completed a minimum qualifying period of employment before they can participate, but that period must not be more than 18 months (6 months in the case of an annual accumulation period for partnership shares).
| Free Shares | Partnership Sales | Matching Shares | Dividend Shares |
|---|---|---|---|
| At least 3 years from the award of shares (this can be up to 5 years if the Company chooses). | None | At least 3 years from the award of shares (this can be up to 5 years if the Company chooses). | 3 years from acquisition. |
Where an employee leaves the company, their shares must be transferred to them. A tax charge may then arise, which is explained under the Tax Treatment for Employees Section below.
| Free Shares | Partnership Sales | Matching Shares | Dividend Shares |
|---|---|---|---|
| Up to £3000 per tax year | Up to £1,500 per tax year, capped at 10% of salary. | Up to two matching shares for each partnership share bought. | Dividends from the shares from the plan can be reinvested - up to £1,500 per year. |
Where the partnership shares have been held in the plan for less than three years, employees will pay income tax and NICs on an amount equal to the market value of the partnership shares at the time they are removed from the plan.
Where the partnership shares have been held in the plan for at least three years but less than five years, employees will pay income tax and NICs on the lesser of the salary used to buy the shares and the market value of the shares at the time they are removed from the plan.
Withdrawal within 3 years of the date of the award (or the relevant holding period if longer) is not possible whilst still employed by the company.
If the shares are withdrawn between three years (or the relevant holding period if longer) and five years after they have been awarded, the employee will have to pay income tax and NICs on the lesser of the market value of the shares when they were first awarded or the market value of the shares at the time they are removed from the plan.
Employees become entitled to shares unconditionally at the end of the holding period. They can choose to leave them in the plan or take them out and hold them elsewhere or sell them. Employees not wanting to pay income tax or NICs on the shares must keep them in the plan for five years.
No Capital Gains Tax is payable when shares are taken out of the plan. Employees who sell their shares as soon as they come out of the plan will have no CGT. Employees may choose to keep shares when they come out of a plan and sell them later. If they do this, they will be liable to CGT only to the extent that the shares have increased in value since they were withdrawn from the plan.
The trust must transfer plan shares to those employees who leave employment for whatever reason. However, if the shares have been held in the plan for at least five years, there is no income tax or NICs to pay.
Where employment ends before the shares have been held for three years, the employees will have to pay income tax and NICs on the market value of the shares at the date of leaving. Where shares have been held for three years but less than five years the employee will pay income tax and NIC on the lesser of the market value of the shares when they were awarded or the market value at the date of leaving. If the employee leaves for one of the specified reasons (such as disability, redundancy, retirement or death), the shares can be withdrawn tax-free.
Employers operating the Share Incentive Plan will be entitled to corporation tax relief, as a deduction in computing their taxable trading profits or as expenses of management, for:
The new plan allows trustees to borrow money in order to acquire shares in the employing company. Where this happens and the company meets the trustees' costs, it may deduct any payment of interest made by the trustees, in computing its corporation tax profits.
It will also be possible for shares to be transferred into a plan from another trust. A corporation tax deduction will be available for free and matching shares acquired from another trust to the extent that no corporation tax deduction has already been given for the acquisition of those shares by the other trust.
An employer will have to operate PAYE and account for NICs where a Schedule E income tax charge arises under the terms of the plan and the plan shares can be readily converted into cash.
There are also important tax reliefs in respect of the trustees of a plan:
For these purposes forfeited shares are treated as being acquired by the trustees on the date that they are forfeited. Provided shares are awarded to employees as described above, the trustees will not have any CGT on the disposal of the shares to employees.
Companies may, if they wish, provide in the plan rules that free shares and/or matching shares will be forfeit if the employee leaves the relevant employment other than for a specified reason such as disability or redundancy. Matching shares can also be subject to forfeiture if the corresponding partnership shares are withdrawn within three years of purchase. However, Partnership shares themselves cannot be subject to forfeiture.
The plan also allows employers to offer dividend reinvestment for employees with shares in a plan. Employers can choose whether to provide:
The dividends received by trustees must be reinvested in plan shares on behalf of employees within 30 of the dividend being paid.
Dividend shares will be subject to a holding period of three years during which employees will not be permitted to sell them, unless they leave the relevant employment. Where employees leave the relevant employment during the holding period their dividend shares will be transferred out of the plan and income tax will be payable on the original dividend as if it had been received in the normal way but in the year employment ceased.
Once the three-year holding period has expired the dividend shares can be withdrawn tax free, and if they are sold immediately there will be no CGT. Alternatively, these can be held in the plan until the participant's employment ceases.
The shares used in a plan must be either:
The shares in a plan must also be:
These rules are the same as for the existing HMRC approved schemes, however, there are some differences from the existing rules for shares that qualify for the existing approved schemes:
