The facts
What are Sips and how do they work?
Share incentive plans (Sips) are a tax-efficient savings vehicle for employees. They are entitled to £3,600 worth of free shares a year, free from income tax and national insurance. The shares retain their tax-free status as long as they remain in the plan for a minimum of five years.
Where can employers get more information?
HM Revenue and Customs’ Share incentive plans: guidance for employers and advisers is available at www.hmrc.gov.uk.
HMRC’s share schemes team helpline is: 0300 123 1079.
IFS ProShare’s employee share ownership helpline is: 020 7444 7104.
Who are some of the main providers?
The main providers include: Capita Asset Services, Computershare Investor Services, Barclays Wealth, Equiniti, RM2 Partnership and Yorkshire Building Society.
Statistics
20.7%: The number of employees increasing their sharesave or Sip contributions in 2014 compared with 2013.
78%: The proportion of organisations offering partnership shares, the most widely offered shares in Sips in 2014.
307,014: The number of employees known to have reached the five year tax-free period.
Source: IFS ProShare
Introduced by the government in 2000, Sips give employers the chance to give or sell shares to their employees, usually as part of a monthly payment scheme, but with attractive tax breaks.
There are four main different types of Sip: free shares, partnership shares, matching shares, and dividend shares.
Free shares given to employees are exempt from income tax and national insurance (NI), while partnership shares are paid for from an employee’s pre-tax salary.
Employers can also give up to two matching shares to members of staff for every partnership share they buy, and dividend shares enable employees to buy more shares with the dividends they gain from free, partnership or matching shares. Employers can offer all, or a combination of, the four share options, according to their business requirements.
Changes to Sip limits
The Finance Act 2014 brought with it a number of changes to Sips for both employers and employees.
One of the most significant was a rise in the annual investment limit for partnership shares under a Sip, which was increased from £1,500 to £1,800.
In addition, the maximum free share award under a Sip rose from £3,000 to £3,600.
In another key change, Sips no longer require prior approval by HM Revenue and Customs (HMRC). Instead, employers need to self-certify any new plans. They must also register any new and existing share scheme members online.
Sips as staff motivation tools
One of the main benefits of a Sip, from an employer’s perspective, is the positive impact they can have on staff retention and motivation.
For the employee, Sips provide the opportunity to invest pre-tax salary in the organisation they work for and become a shareholder, which means sharing in the future success of the company.
The longer an employee stays with their employer, the more they can benefit from the tax advantages of a Sip and they will probably be more likely to take an interest in the organisation’s performance. This, in turn, can have a positive impact on levels of job satisfaction and employee engagement, both of which are seen as key drivers of productivity.
Tax-free status
The income tax treatment of Sips depends on the length of time the shares remain in the plan. In broad terms, those held between one and three years are liable to income tax and NI contributions on the date they are removed from the Sip.
Between three and five years, the removal of shares results in income tax and NI being payable on the award (purchase) price or the price at the time of withdrawal, whichever is lower.
If employees keep their free shares in the plan for five years or more, they will retain their tax-free status.
An employee who leaves the organisation for what is considered a ‘good’ reason, for example retirement or redundancy, will have no tax liability when removing their shares, regardless of how long they have held them. If the shares are held in the plan for a minimum of three years, no income tax or NI is payable on the investment.
