If you read nothing else, read this…
- Share incentive plans (Sips) celebrate their tenth anniversary next month.
- If staff hold shares in a Sip and stay with their employer for five years, they will not incur tax or NI on the value of the shares.
- Although Sips offer, arguably, one of the most lucrative returns on investment for staff, many are put off by the five-year retention period.
- Transferring Sips shares to individual savings accounts or other investments is relatively uncommon at the moment, but is set to become a growing trend.
The recession has sparked renewed interest in share incentive plans as a tax-efficient investment option for staff, says Georgina Fuller
It is 10 years since share incentive plans (Sips) were introduced in July 2000 and, in the light of the recession, they may be considered more valuable than ever.
Through Sips, employees can spend up to £1,500 a year or 10% of their total salary, whichever is less, to buy shares (known as partnership shares). If they wish, employers can offer up to two matching shares for every share an employee buys, giving staff up to £3,000 worth of free shares each year.
If employees stay with their employer and hold their shares in the Sip for five years, they will not incur any tax or national insurance (NI) on the value of the shares.
Sue Bartlett, director of consulting services at Towers Watson, says there has been a resurgence of interest in Sips as employers look at more effective ways to boost wealth creation. “Employers are dusting off their Sips and looking at them again, especially after the recent increases in NI rates,” she adds. “The tax relief option means you are cushioned from the usual investment risks.”
Maximise flexibility of Sips
Some employers are also keen to maximise the flexibility Sips offer, says Phil Ainsley, head of employee share plans at Equiniti. Existing employees and leavers in some companies now have the option to transfer shares to other investment products, such as individual savings accounts (Isas), to further their portfolio.
“The ratio of matching shares [to employee contributions] has evolved, with some of the more generous matches reduced for cost reasons,” says Ainsley. “However, some employers have chosen to retain the ratio but reduce it to a lower investment value so the benefit is targeted at those lower down the pay scale.
“As Sip holdings increase and holders move closer to retirement age, we expect this will become an important consideration for employers to enable their employees to further maximise the tax advantages of Sips.”
Sips are usually available to staff as soon as they join an organisation, but many employers offer free shares based on length of service. “We have seen more instances where the value of the award is pro-rated dependent on length of service,” says Ainsley. “This makes the plan accessible to a greater number of employees, rather than excluding recent joiners.”
Employers are also becoming more creative when it comes to communicating Sips to staff. Media giant Emap, for example, produced a podcast about Sips in the studio of its radio station Kiss FM for staff to tune into.
But although the recession has led to a more cost-conscious culture, it has also discouraged some employees from saving. Vincent Joseph, finance director at construction company Bouygues UK, says: “New joiners are hesitating to join our Sips or investing less. At the moment, many feel they may need that money at short notice rather than holding onto it for five years.”
Joseph says cutting the retention period could make Sips more appealing to staff. “One way to encourage employees to save more would be to reduce the period before [they] gain the full tax benefit of the scheme down from five years to three or four.”
But Sips are an effective way to boost employee engagement and align the interests of staff and shareholders, says Ricky D’Ash, remuneration specialist at Equity Insurance Group. “During periods where the stock markets have been extremely low, a Sip participant will benefit because their contributions will buy more shares in the company and therefore have the potential for better growth.”