How to set up a share incentive plan (SIP)

A share incentive plan or SIP is one of the tax-efficient employee share schemes available in the UK, aimed at providing employers with an easy and flexible way to offer shares in the company to their employees.

A quick introduction to Share Incentive Plan (SIP)

A share incentive plan (SIP) works by awarding eligible employees free shares and/or allowing them to purchase shares in the company. The shares are kept in a trust until the employee either leaves the job or decides to take the shares from the plan.

Employees can be offered one or a combination of the following four share awards:

1. Free shares: Each employee can be offered free shares worth up to £3,600 annually.
2. Partnership shares: Employees can be invited to buy partnership shares via deductions from their pre-tax salaries. They can use up to £1,800* or 10% of their salary each year – whichever is less to buy these shares.
3. Matching shares: Where employees acquire partnership shares, companies can give them up to 2 matching shares for each partnership share they buy.
4. Dividend shares: If employees are paid dividends on their free, partnership or matching shares , those dividends can be used to buy more shares. These are dividend shares.

Setting up a SIP step-by-step

1. Design your SIP

Under a Share Incentive Plan, shares can be awarded through one (or a combination) of these methods: Free Shares, Partnership Shares, Matching Shares and Dividend Shares. Remember there are limitations of the value for each share award being issued.

Other things to consider:

• Employee eligibility criteria (i.e. a period of up to 18 months of employment before employees become eligible)
• Performance-related awards (i.e. link the award of free shares to employee performance measures)
• The amount of equity to set aside for the share scheme
• Any rights and conditions that are to be attached to the company shares, such as voting rights, leaver provisions, forfeiture and what happens if the status of the company changes.

2. Get approval from your shareholders

Before setting up a SIP you may be required to seek shareholders’ approval. To learn more, review your company’s Articles of Association where it should outline the rights and restrictions of shares under a company share scheme as well as those held by existing shareholders, ensuring any decisions made are compliant.

Listed companies will normally need the consent of their shareholders before setting up a SIP.

3. Make amendments to your Articles of Association

If required it may be possible to amend the rights and restrictions in a company’s Articles of Association. It could be a balance between delivering value to employees and protecting the interests of other shareholders.

A company will need the agreement from its shareholders before changing its Articles of Association.

4. Prepare the share valuations and get agreed by HMRC

As a share plan manager, you will also need to establish the value of the shares being used in a SIP. If you’re unsure what this entails please arrange a meeting with one of our experienced professionals. We’ve worked with industry trusty valuation providers and are happy to introduce them.

Once you’ve received the valuation report, notify the HMRC Shares and Assets Valuation team to agree on the value of shares in your SIP by filling in a VAL230 form. While it’s not a mandatory step, companies usually would not skip this as it will help to make sure the tax status of the employees and the companies themselves will remain unchanged.

5. Draft key documents

You should start working with your lawyer to prepare plan documents, contracts and other documents for the share award. The exact requirements here will depend on the details and type of plan being introduced.

6. Plan employee communications

This is a good time to begin planning employee communications. An effective communications strategy should aim to make the scheme clear and memorable to those it is being aimed at, while being sure to place the employee at the heart of everything. This is something we can help you with. We can customise an employee communications package suited to meet your needs, helping you segment the audience, create a mix of targeted materials package and aimed at demystifying the equity process.

7. Implement plan rules

Once you’ve the valuation agreed, you can explore tools to implement and enrol employees in your SIP, whether that is a spreadsheet or equity management software. The latter option provides both technology solutions and extensive support from equity professionals while also offering other benefits, such as API integration and access to reports.

If you want to learn more about effective digital SIP administration, contact J.P. Morgan Workplace Solutions for a free demo.

8. Notify HMRC once set up

It’s worthwhile to highlight that you don’t need to obtain HMRC approval for your plan but regardless you should ensure that you set it up to meet all the necessary conditions.

Once the setup is completed, you need to self-certify it by 6 July following the tax year in which shares are first awarded to or bought by employees that the business meets all the necessary conditions.

Administer the plan on an ongoing basis

Congratulations! You are all set.

However, this is just the beginning of a new journey of ongoing SIP administration. You are required to track and report any changes in ownership, process transactions, update documents and policies, communicate with stakeholders, stay compliant and a lot more.

Alternatively, you can choose to outsource this complex function, either partially or entirely to a share plan service provider so you can focus on your core business.

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At J.P. Morgan Workplace Solutions, we’ve helped so many companies customise their SIP administration solutions and tailor-make effective employee communication strategies. Contact us now for more information on how best to manage your SIP scheme.

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