The Share Incentive Plan (SIP) was first introduced in The Finance Act 2000 and initially referred to as the All Employee Share Ownership Plan (AESOP). There are a number of Share Incentive Plans up and running and but no particular plan is as yet identified as the ideal template. That's because unlike the traditional employee share plans, SIPs have flexibility as part of their design brief. This re-enforces the need for companies to understand what they want from the Plan from the beginning.
SIPs can offer employees a combination of four types of shares:
|
Share type |
Maximum amount for share purchase |
|---|---|
|
Free |
£3,000 |
|
Partnership |
£1,500 |
|
Matching |
£3,000 |
|
Dividend |
£1,500 |
|
Total |
£9,000 per tax year |
How SIP works is determined by what suits a company best. For example, it is possible to offer all, or a combination of the above shares types and on a variety of frequencies.
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To encourage companies, the Government has made SIP probably the most tax-advantaged all employee share plan ever introduced in the UK. There are other benefits too:
Whilst there are clear benefits, because the plan deals in shares not options, there are some risks for employees. The real danger is that employees see their hard-earned salary invested in shares, which become worth less than they paid for them. Tax relief can offset this risk but to secure the full benefits of this the employee must not only hold the shares for longer but also remain an employee for longer. Surely a good thing for companies.
How does SIP compare to existing Plans? The tables below provides a comparison between SIP and Sharesave, two of the most popular employee share plans. Both plans can of course run very successfully along side each other and many companies have adopted this implementation formula.
SIP/Sharesave Comparison of benefits to Company and Employee
COMPANY PERSPECTIVE
|
Sharesave |
|
|---|---|
|
Motivational impact for longer |
Employees view shares in |
|
Options not charges to P/L account |
(Changes proposed) |
|
No National Insurance contributions advantage |
Corporation Tax and National Insurance relief |
|
Issue of shares at discount |
No discounts (but savings from Gross Pay) |
|
Administration is free |
Fee for administration |
EMPLOYEE PERSPECTIVE
|
Sharesave |
|
|---|---|
|
Low risk for employees |
High risk of loss |
|
Encourages savings |
Savings only on Partnership |
|
No National Insurance contributions advantage |
Highly tax efficient |
|
Higher reward potential |
Encourages direct Company share ownership |
SIP/Sharesave Comparison of main features
| Feature | Sharesave | SIP |
|---|---|---|
|
Minimum savings |
£5 per month |
£10 per month |
|
Maximum savings |
£250 per month |
£125 per month - no more than 10% of gross salary |
|
Tax relief |
No income tax or National Insurance on savings or bonus |
No income tax on exercise of option - see table under Partnership shares below |
| Discount | up to 20% | No discount on free shares - companies can match Partnership Shares on a maximum of 2:1 basis |
| Interest | Paid tax free | None paid |
| CGT |
|
|
| Holding period | None - but 3, 5 or 7 year option period | Up to 5 years |
| Price | Guaranteed | Not guaranteed |
| Flexibility to change savings amount | None | For Partnership shares, usually one in an accumulation period |
| Option | Yes | No |
| Risk | No risk during the sharesave option period | Immediate as shares held from the award date |
| Ownership of shares | After exercise of option | Immediate (held in Trust) |
| Saving term | 3 or 5 years | 1 month min, max 1 year |
| Right to receive dividends | Once option has been exercised and shares owned | Can be immediate and re-invested in the plan or remitted to the employee (subject to plan Rules) |
|
Sale |
Allowed on exercise of option | Allowed a withdrawal from the plan |
SIP - the details of how it works
What is the limit on the value of free shares that can be provided?
Free shares have a limit of £3000 per tax year.
Can companies limit awards of free shares to employees who already have shares in the company?
No. The plan requires that all employees be invited to take part on the same terms. The only way an award of free shares can be varied is on the basis of remuneration, length of service, hours worked or team performance.
What is the holding period?
A plan must specify a holding period of between three and five years for free and matching shares. Participants must keep these shares in the plan, and not to assign, charge or otherwise dispose of their interest in these shares. This holding period must be the same for all participants in any given award of shares, and may not be increased once shares have been awarded. Employees' obligation to keep their shares in the plan, end if they leave your company during the holding period.
Why is there a holding period?
A compulsory holding period stops employees selling their free and or matching shares as soon as they receive them, encouraging a longer term stake in the company.
Can employers give more shares to some employees than others?
Yes, but only for free shares, provided these varying awards are linked to fair and objective performance measures.
What are Partnership Shares?
Partnership shares are shares available for employees to buy to increase their shareholding in the company. Up to 10 % of salary or £1500 max per tax year, i.e. a minimum of £10 to a maximum of £125 per month.
You can decide to allow participants to buy either monthly or at any period up to a maximum of 1 year. The purchase is from Gross Income and is therefore highly tax efficient. The shares are bought at either the market price at the start of the accumulation period or at the market price at the end, whichever is lower.
For monthly purchase the shares must be bought within 30 days of the salary deduction. The price paid is the market price at the time of purchase (not salary deduction).
The table below indicates the tax relief available. Please note that the future budgets may effect the amount of tax and National Insurance relief:
| Monthly Contribution (gross pay) |
Cost of shares to basic tax payer (22%) NI 11%* Earning £20,000 p.a |
Cost of shares to higher tax payer (40%) NI 1%* Earning £40,000 p.a. |
|---|---|---|
|
£10 (min) |
£6.70 |
£5.90 |
|
£50 |
£33.50 |
£25.00 |
|
£100 |
£67.00 |
£59.00 |
|
£125 (max) |
£83.75 |
£73.75 |
* N.B. Calculations are based on the 2003/2004 tax and NI rates, and current legislation.
What happens when the partnership shares are sold of the participant's own accord?
This depends on how long the shares have been owned. Unlike the Free and Matching Shares, Partnership shares cannot be subject to forfeiture. The employee has a right to them as soon as they purchase them. However if the employee sells their shares then they incur tax and National Insurance on the proceeds, and if applicable Capital Gains Tax (CGT). The value on which the shares are taxed depends upon how long they have been in the Plan.
This table summarises the tax position on partnership shares and the value that is taxable on sale dates.
| When sold | Taxable value |
|---|---|
|
Years 1, 2 or 3 |
Income tax and NI payable on the market value at the date of withdrawal |
|
Years 4-5 |
Income tax and NI payable at the lower of the pay used to buy the shares or the market value at the date of withdrawal |
| After 5 years | None |
Can contributions be stopped and restarted?
Yes, but only once in the same accumulation period. Contributions can be restarted at anytime. Any contributions missed cannot be made up.
Can contribution amounts be altered?
Monthly contributions can be revised at anytime, but again only one change is allowed in an accumulation period.
What happens if a participant leaves the company due to injury, disability, redundancy, retirement at or after reaching age 60?
When a participant leaves the company partnership shares will be removed from the Trust and registered in the name of the participant. If the participant leaves for any of the above circumstances no income tax or NIC charges will be incurred.
What happens if a participant is transferred to a non participating company within the group?
Shares already purchased can remain in the trust in the normal way and any additional monies the Trust is holding for can be used to purchase further shares. However, no further contributions can be made.
What happens if a participant is on long term sick or maternity leave?
Whilst a participant is still receiving pay contributions will continue as normal, unless the Trust is instruct otherwise. NB if a participants contributions exceed 10% of gross pay whilst away from work the Trustee will be obliged to return excess contributions. Once on unpaid sick or maternity leave contributions must cease as a result of statutory provisions. Any contributions missed cannot be made up at a later date.
What happens if a participant dies in service?
Any partnership shares held in trust will be transferred or paid to the estate free of all tax.
What are Matching Shares?
The company gives matching shares free to employees. They are issued in relation to the amount of shares the employee buys through the partnership shares. The basics behind the shares are that they will increase the take up rates of partnership shares if offered. They are subject to forfeiture, like Free shares.
Is there a limit on the ratio of matching shares that can be provided?
Yes, the maximum matching to partnership share ratio is 2:1, but it can be any ratio up to this amount.
Does the company have to issue matching shares?
No, they are entirely at the discretion of the company.
Are the matching shares linked to performance?
No, unlike free they are not linked to performance
Can the company change the ratio of matching shares to partnership shares?
Yes, but only at the start of a new accumulation period, not during.
What are Dividend Shares?
Dividend shares are issued instead of paying cash when the dividend is paid. If the dividends are taken as shares, then they are tax-free.
Is there a limit on the amount of dividends, which can be re-invested?
Yes £1500 in a tax year.
Do all participants have to re-invest dividends?
Depends on plan rules, the company can choose to make it compulsory or optional.
Is there a holding period for dividend shares?
Yes, however it cannot be more than 3 years.
What happens if you get fed up of reading this or still have unanswered questions?
| Employees | Ring our Member Contact Centre on 0845 1 200 300 |
| Companies | Ring our Development Manager on 01274 263103 and ask them to give you a five minute "All you ever wanted to know about SIP" speech! |
Questions frequently asked by SIP Participants
How do I close my SIP?
Obtain a SIP Change Form from your Payroll and return to YBS
How do I notify you of a change of address?
Obtain a SIP Change Form from your Payroll and return to YBS
I have left the Company, what do I do now?
You will have to close down your SIP and all shares will be released, subject to tax/NI depending on when and why you leave. Speak to your Payroll for further advice. They will give you a SIP Change Form to complete and return to YBS within 7 days of leaving employment.
Can I pay any tax/NI liability myself?
Yes. Tick the box on the SIP change form and we will advise you of the amount to pay.
When I have released shares form the Plan, how long will it take to receive my share certificate?
Usually within 4 weeks of us processing your SIP Change Form.
How do I change my Partnership deduction amount or stop/restart Partnership contributions?
Advise your Payroll and complete a SIP Change form and return to YBS.
I do not know how many shares are held in my SIP. How do I find out?
Ring 0845 1 200 300 and ask for a SIP statement.
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