Share Incentive Plans (SIPs) explained

Motivated, engaged employees play a key role in the success of your company. Share Incentive Plans (SIPs) have become a common benefit that companies offer to incentivise their staff and drive success. They’re a way to give employees shares in the company to foster a sense of ownership and engagement. In this article, we’ll explain what Share Incentive Plans are, the different types, how they work and the benefits of having a SIP, for both your employees and your company.

In the article:

• What is a share incentive plan?
• What are the types of share incentive plans?
• What are the advantages of share incentive plans?
• What are the tax benefits of SIPs for employees?
• What are the tax benefits of SIPs for companies?
• What happens to the shares if an employee leaves the company?
• What’s the difference between share options and share incentive plans?
• Talk to an expert

What is a share incentive plan?

In the UK, share incentive plans are a government-supported way for companies to give employees tax-advantaged shares in the company they work for. Share incentive plans give employees the opportunity to gain a financial reward from the company beyond their annual salary. They’re a popular way for companies to give employees a sense of ownership of the business, with the aim of improving engagement and motivation.

Employees are given shares upfront, according to the plan rules set by the company that issues them. There are different types of share incentive plans (covered below) which usually come with tax benefits. If the employee keeps their shares in the plan for a specified number of years, they can get the tax benefits (more on this below).

What are the types of share incentive plans?

In the UK, there are four main types of share incentive plans:

• Free shares – companies can give up to £3,600 of free shares in any tax year. Employees can’t take the shares out of the plan for the first three years. If they leave the shares in the plan for five years, they can get the full tax benefits when they sell them
• Partnership shares – employees can buy shares in the company out of their salary before tax deductions. There’s a limit to how much they can spend – either £1,800 or 10% of their income for the tax year, whichever is lower. The employee can take partnership shares out of the plan at any time
• Matching shares – companies can give up to two free matching shares for each partnership share the employee buys. If the employee takes their partnership shares out of the plan before five years have passed, they could lose the matching shares the company awarded (it depends on the company’s plan rules)
• Dividend shares – companies can allow employees to buy more shares with the dividends they get from free, partnership or matching shares. They won’t pay Income Tax if they keep the dividend shares for at least 3 years

Share option schemes are another type of share incentive, but they fall under different regulations. We’ll explain that further down.

What are the advantages of share incentive plans?

Share incentive plans can give employees a sense of ownership in the company and the opportunity to receive financial rewards on top of their salaries. Rewarding your employees in this way can also help your company:

💪Cultivate a culture of engaged and motivated employees
🏆Attract and retain top talent
🥅Align employees with company goals
🙏Build a company culture where employees are valued

What are the tax benefits of SIPs for employees?

HMRC gives employees and companies tax relief on shares issued via a share incentive plan if employees keep their shares in the plan for five years (or three for dividend shares).

If the employee keeps their shares in the plan for the specified number of years, they’ll get the following tax benefits:

• No Income Tax or National Insurance due when they’re awarded shares
• No Capital Gains Tax (CGT) due on the profit they make from selling the shares, if they keep them in the plan until they sell them (read below to find what happens to the shares in the plan after they leave the company).

If an employee takes the shares out of the plan and sells them before five years are up (or three for dividend shares), they’ll have to:

• Pay Income Tax and National Insurance on the value of those shares
• Pay CGT on the profit they make from selling the shares

No Income Tax or National Insurance Tax will be due, however, if an employee leaves the company for the following reasons:

• injury or disability
• redundancy
• the company or part of the business they work for is sold out of the group
• retirement
• death

Take a look at HMRC’s table below to understand how tax works in each scenario for the different types of share incentive plans.

What are the tax benefits for companies?

Companies get the following tax benefits from SIPs:

• They can deduct the cost of setting up and running SIPs from their Corporation Tax bill
• They can deduct the amount of an employee’s salary used to buy partnership shares from their Corporation Tax bill
• They can deduct from their Corporation Tax bill an amount equal to the market value of free and matching shares awarded to each employee
• They don’t have to pay National Insurance on the market value of the shares when an employee takes them out of the scheme after five years (three for dividend shares)

To get these tax benefits, share incentive plans must be registered with HMRC. The SIPs regulations provide the framework for companies to establish and give SIPs. The plan must be approved by HMRC to make sure your scheme complies with the regulations.

What happens to the shares if an employee leaves the company?

When an employee is awarded shares in the company, that employee owns the shares and can decide what they want to do with them. If an employee leaves the company after they’ve been issued shares, those shares still belong to them, but must come out of the plan.

The employee can choose when they want to sell their shares after they remove them from the plan.

With Free, Matching and Partnership shares (explained above), if an employee leaves the company before five years pass (after being issued with the shares) they will have to pay Income Tax and National Insurance Contributions (NICs) on the shares. However, after five years, they won’t need to pay Income Tax and NICs.

For Dividend Shares, if the employee only needs to keep the shares for three years to benefit from no Income Tax or National Insurance due on shares.

What’s the difference between share options and share incentive plans?

Both share option schemes and share incentive plans are valuable tools for companies to motivate and engage employees.

The main difference is that share options are the right to buy shares later if certain conditions are met, while other share incentive plans give employees the opportunity to buy shares immediately (within certain criteria).

Companies can set up two types of share option schemes:

• EMI Scheme – tax-advantaged scheme backed by HMRC
• Unapproved Scheme – for overseas employees, consultants, freelancers, advisors and more (not backed by HMRC)

Want to learn more about share option schemes? We have a library of resources. Start with these:

• Share options explained: the essential guide for UK startups
• Tax implications of share option schemes: here’s what you need to know
• Startup equity: how much to give employees

Talk to an expert

If you want to explore setting up a share option scheme, you’re in the right place. We help thousands of founders set up and run their share option schemes in the quickest, most cost-efficient way possible. Book a free call with one of our experts and we’ll talk you through how it works.