Share Incentive Plans (SIP): A Guide

What is a Share Incentive Plan (SIP)?

A share incentive plan is one of the two UK employee share schemes introduced in 2000, aimed at providing employers with an easy and flexible way to offer shares in the company to their employees.

This scheme has gained traction among UK companies with the number of companies offering SIP schemes to employees increasing. In this post, we’ll cover:

• How does a share incentive plan work?
• SIP tax rules
• Are share incentive plans worth it for employers?
• Are share incentive plans worth it for employees?
• Other things to consider FAQs

How does a share incentive plan work?

A share incentive plan (SIP) works by awarding eligible employees free shares and/or allowing them to purchase shares in their 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: You can annually give each employee free shares worth up to £3,600 (as of 2024/25). All of your employees should either receive the same number of shares or they could be allocated depending on remuneration, length of service or hours worked. 
2. Partnership shares: You can invite employees to buy partnership shares via deductions from salary pre-tax and NIC. They can use up to £1,800* or 10% of their salary each year – whichever is less to buy shares. 
3. Matching shares: Where employees acquire partnership shares, you can give them up to 2 matching shares for each partnership share they buy.
4. Dividend shares: Your employees as a shareholder may be paid dividends on their free/partnership/matching shares. If so, you could allow them to use those dividends to buy more shares. These are dividend shares.

SIP tax rules

Although these four SIP share types have different definitions, their tax consequences are similar. See the breakdowns below:

A. Free Shares

1. Acquire shares:
   When an employee acquires the shares, no income tax or NICs is chargeable on the value of the free shares.
2. Take shares during the first 3 years (Note: May not be allowed sometimes):
   Pay income tax on the market value of the free shares at the time of withdrawal.
3. Take shares between 3 and 5 years from the date of acquisition:
   Pay income tax on the lesser of:
   – The market value of the shares at the time of acquisition, and
   – The market value of the shares at the time of withdrawal.
4. Take shares after 5 years from the date of acquisition:
   No income tax or NICs is chargeable.

B. Partnership Shares

1. Acquire shares:
   No income tax or NICs is chargeable on the money spent to buy the partnership shares.
2. Take shares during the first 3 years:
   Pay income tax and NIC on the market value of the partnership shares at the time of withdrawal.
3. Take shares between 3 and 5 years from the date of acquisition:
   Pay income tax on the lesser of:
   – The market value of the shares at the time of acquisition, and
   – The market value at the time of withdrawal
4. Take shares after 5 years from the date of acquisition:
   No income tax or NICs is chargeable.

C. Matching Shares

The tax situations of matching shares are the same as the free shares.

D. Dividend Shares

1. Acquire shares:
   No income tax or NICs is chargeable on the dividends used to buy the dividends shares.
2. Take shares during the first 3 years (Note: May not be allowed sometimes):
   Pay income tax on the amount of the cash dividend originally used to acquire the dividend shares, at the prevailing dividend rate at the time of withdrawal.
3. Take shares between 3 and 5 years from the date of acquisition:
   No income tax or NICs is chargeable.
4. Take shares after 5 years from the date of acquisition:
   No income tax or NICs is chargeable.

Are share incentive plans worth it for employers?

1. Provide corporate tax benefits:

You’ll get corporation tax relief for launching and operating the scheme, including:

• Employees’ salary used to purchase partnership shares,
• Together with any additional costs of providing those shares.
• The market value of the Free / Matching Shares when they were originally acquired by employees.
• Any costs related to establishing and running a SIP.

Also, there will be no employer’s NIC or Apprenticeship Levy charges for you to pay.

2. Improve productivity:

Employees can be more motivated to work towards the company’s goals as their investment is based upon the performance of the company.

3. Retain and attract talent:

SIP is an effective scheme to reward employees beyond their salaries. If the company succeeds and its value continues to grow, an employee could receive greater financial benefits from share awards than cash bonuses.

But, young employees tend to change jobs every 2.4 years according to the research from ProShares. So, they may be reluctant to tie themselves down to a financial investment for five years.

Are share incentive plans worth it for employees?

1. Receive financial benefits

As discussed, your share awards could potentially bring your employees substantial financial wealth. If they are given free shares, they usually will earn under any circumstances even if the shares drop because they have paid nothing for them in the first place.

2. Enjoy generous tax benefits

The SIP tax benefit is one of the most attractive benefits to employees. As discussed, no income tax or NIC is chargeable when employees acquire the shares and take them from the plan after five years from the date of acquisition.

Also, capital gain tax is not chargeable on the increase in value of the shares whilst the shares remain in the SIP trust.

3. Reduce tax burden via pre-tax contributions

If your employees purchase Partnership Shares, the salary deductions come from pre-tax earnings, meaning they do not have to pay income tax or national insurance on the pay used to purchase the shares.

But, an SIP does involve risks. They cannot choose to take their savings pot back like is possible in the SAYE scheme at the end of the term, even if the market value of the share goes below the value at the time of purchase when the scheme ends.

Other things to consider

1. Good leaver definition

If an employee is considered a good leaver, they’ll receive full tax benefits – no income tax and NICs on withdrawal of the shares from the SIP at any time. Good reasons to leave include:

• Injury
• Death
• Retirement
• Redundancy
• Disability
• TUPE (transfer of undertakings)

If the business is taken over and the employees are offered cash for their shares, this is also often a good reason to withdraw them.

2. Eligibility

All UK-resident employees of nominated group companies must be eligible to participate in a SIP. However, subject to certain conditions, the company can set a minimum service period of up to 18 months for new entrants.

3. Setup

After checking your company’s eligibility, you can then set up a SIP by preparing a trust deed, a set of plan rules, and certain other documents such as a partnership share agreement and free share agreement.

Next, you will need to register via the HMRC’s Online Service Portal. The plan should be registered by 6 July in the year following you set up the plan. In the meantime, you can appoint a trustee to administer your trust.

4. Administration

Share incentive plan administration is a continuous process where you will manage every change in personnel – joiners and leavers, adjust plan design details, track enrolment and a lot more.

Whether you’re looking to upgrade your existing plan administration or looking for a solution to administer your brand new plan, we’re happy to help you find the right solution.

Here at Global Shares, a JP Morgan company, we know how to guide  companies looking to launch their own SIP or any type of employee share scheme because we’ve helped so many to do it – let us help you bring out the best in your plan.

Request a free demo and see what our software and support can do for you.

FAQs about SIPs

What is a share incentive plan?

A share incentive plan (SIP) is a tax-advantaged all-employee share scheme introduced in the UK, allowing employees to own shares in the company.

A SIP works by awarding eligible employees free shares and/or allowing them to purchase shares in their company. The shares are kept in a trust until they either leave the job or decide to take the shares from the plan.

There are four types of share awards: #1. Free shares #2. Partnership shares #3. Matching shares #4. Dividend shares

Are SIPs tax free?

When employees acquire the shares, no income tax or NICs is chargeable. When they take shares from their plan after 5 years from the date of acquisition, no income tax or NICs is chargeable. But if they take shares less than 5 years, they will be obliged to pay income tax and NIC.

Are share incentive plans worth it for employers and employees?

For employers, SIPs provide generous corporation tax benefits, help retain and attract talent and improve productivity.

For employees, SIPs provide financial rewards, offer tax benefits and can help to reduce their tax burden.

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