Share Incentive Plans (SIPs)
Share Incentive Plans (SIPs) are tax efficient plans designed to encourage employees to hold shares in their company over the longer term, thereby directly benefiting from the success of the company. This flexible all-employee plan offers tax relief to both employees and their employing companies and can be structured to include a number of elements, as described below.
Free shares
Companies may offer free shares to their employees, up to a limit of £3,000 per tax year. All qualifying employees may be given the opportunity to receive free shares. However, free shares may be distributed on the basis of three factors comprising remuneration, hours worked and/or length of service. In addition, a company may if it chooses, make an award of free shares with reference to performance. A holding period of between 3 and 5 years must be specified, and employees who exit the plan during this period may forfeit their shares.
Partnership shares
Companies may deduct up to £125 (up to a maximum of 10%) of the employee's gross monthly salary in order to purchase shares in the company. Partnership shares are tax efficient for employees as the amount of their income that is used for the purchase of partnership shares is deducted from their gross salary. If the shares are held for for the full 5 years, no Income Tax is payable in respect of the purchase monies used, nor any Capital Gains Tax (CGT) or National Insurance (NI) is payable on any rise in the share price. Tax and NI may be payable if the shares are sold within this period. Employees are motivated to continue working for their employer until the end of the full 5 year period in order to realise any gains tax free.
Matching shares
Matching shares awarded under a SIP are linked to partnership shares. The number of matching shares that may be awarded is dependent upon the number of partnership shares purchased by an employee with a maximum of 2 matching shares for every partnership share acquired. Offering matching shares may be a positive way to increase the take up of partnership shares. As with free shares, matching shares are forfeited if employees leave the scheme prior to maturity.
Dividend shares
As an alternative to cash dividends paid in respect of the shares by employees within the plan, dividends can be re-invested as shares and saves the employee from having to pay tax on the dividend payment. The maximum amount that can be invested in dividend shares is £1,500 per tax year.
The legislation is flexible to allow SIPs to be structured depending upon the employing company's circumstances to provide a valuable addition to the reward package offered to employees, in addition to fostering commitment and motivation. An added advantage is that corporation tax relief may be available to companies on shares sold or given away for free.
HBOS EES are experienced in the administration of SIPs having taken them on on behalf of clients from their launch in 2000. Contact us to find out how we can deliver a customised SIP to meet your company's needs.
