What are share incentive plans?
Share incentive plans (Sips) were introduced in the UK in 2000 as a type of employee share scheme aimed at helping employees, who can purchase shares or be awarded free shares in the company, to save in a tax-efficient way. By promoting employee ownership and participation, Sips can help to align the interests of employees with the long-term success of the company.
Sips are one of four official government-approved share plans and require HM Revenue and Customs (HMRC) approval to implement. The others are sharesave schemes, enterprise management incentives (EMIs) and company share option plans (Csops).
Sips enable employees to receive shares in their employer either free or to purchase these from their gross pay on a discounted basis. The shares must be held in a trust, set up and operated for the plan, for a minimum of three years and up to five years to obtain the full tax advantages. According to the 2021 Proshare SAYE and Sip report, published in August 2022, in organisations that offer a Sip to employees, 41% of eligible staff participated.
When an employer decides to set up a Sip, it can choose to offer employees shares in up to four ways: free shares, partnership shares, matching shares, and dividend shares.
What are the cost implications?
The costs associated with implementing a Sip can depend on a number of factors, including the size of organisation, the number of employees participating, and the specific features of the plan. Costs can include administrative expenses and the costs of working with professional advisors to identify the most suitable provider and scheme type for their organisation. Additional costs may be incurred as a result of legal fees and compliance requirements.
Employers can provide each employee with free shares, with a maximum value of £3,600, annually. Free shares must be withdrawn from the Sip once the employee leaves the company. If the shares are sold after withdrawal, no capital gains tax is due.
Partnership shares and other shares are purchased by the employee from their pre-tax salary up to an annual limit of £1,800 a year. The system is flexible, as employees can top up their contributions up to the annual limit in months where they have more disposable income.
With matching shares, the company can match the financial contributions each month from the employee’s salary, or match a proportion of them, without a cost to the employee.
Partnership shares often work in conjunction with matching shares. Employees who are shareholders may be paid dividends on their free, partnership, or matching shares. Their employer can allow them to use those dividends to buy more shares, known as dividend shares.
Employers can decide which option they wish to implement, or which combination would best suit their organisation. According to the aforementioned Proshare report, 28% of respondents offered free shares in 2021, while 58% offered matching shares, up from 54% the previous year. The most popular match was one-to-one, one matching share for every partnership share purchased, followed by 2:1 and 1:2.
Studies have shown that where people participate in an employee share plan, they develop better financial habits. The Proshare report also revealed that the weighted average value of a Sip participant’s holding in their employee share plan was £10,294 at the end of 2021. This suggests that by offering a Sip, employers can fulfil their role of providing financial wellbeing and financial resilience for those who participate in the scheme.
Are there any potential tax issues?
Sips have tax advantages. The monetary contributions come from an employee’s pre-tax salary, meaning staff do not have to pay income tax or national insurance (NI) on their share purchase, with employers also saving on NI contributions. Employees do not have to pay capital gains tax as long as the shares are still in the Sip. To remain tax free, the shares have to sit in trust for between three to five years depending on the individual plan. This also ensures the shares are exempt from capital gains tax, which will be applied if the shares are taken out of the plan early.
Employers can also claim tax deductions for the costs associated with running a Sip, and on the market value of any shares that are awarded.
Little has changed in recent years in terms of how Sips are structured and delivered, however, the Treasury recently issued a call for evidence on tax-advantaged sharesave schemes and Sips.It will consider whether there are barriers to participation, whether the sharesave and Sip regimes are simple and clear, and whether they offer sufficient flexibility for individual employers’ commercial needs. It will also look at whether sharesave and Sip appropriately encourage share ownership for lower earners
Where can employers get more information?
Sips are governed by HMRC, therefore, organisations can access more information at www.gov.uk/government/organisations/hm-revenue-customs.
Who are the main providers?
Leading providers of Sips include Computershare, Equiniti, Global Shares, Ledgy, Link Group, Morgan Stanley at Work and The RM2 Partnership.