Share Incentive Plan (SIP)

A share incentive plan (SIP) is a type of employee share scheme that allows an employer to award shares to all their employees with the motivation of incentivising them.

The plan is designed to align the interests of the employees with those of the company and its existing shareholders, by linking the value of the shares with the performance of the business. Each participant in a Share Incentive Plan can receive shares worth up to £9,000 per tax year. 

Companies can make various different types of awards under a SIP. Under a Share Incentive Plan, shares can be awarded to employees through one (or a combination) of the following methods: Free Shares, Partnership Shares, Matching Shares and Dividend Shares.

Free Shares allow employers to give up to £3,600 worth of shares (free from tax and National Insurance Contributions (NICs) to each employee each tax year (although employees may be subject to income tax and NICs in the future). Partnership Shares allow employees to purchase shares out of pre-tax salary normally worth up to £1,800 per tax year. Partnership Shares can also be combined with Matching Shares, where for each  share bought, employees can receive up to two free additional shares. If a company pays dividends on the shares held in the SIP these can be reinvested as Dividend Shares rather than paid in cash.

With all types of award in a SIP, employee shares are held and protected under a Share Incentive Plan Trust, where after a five-year period the shares can be withdrawn and sold with no Income Tax or NICs owed by the employee or the business. SIP shares are also free from Capital Gains Tax (CGT) for so long as they are held in the SIP Trust.

A SIP is an all employee plan, which means that the company must make the plan available to all employees in the business (although, in companies with subsidiaries, it is possible to offer the plan only to specific subsidiary companies if that is preferred).

There are several business productivity and tax-related advantages to Share Incentive Plans. Some of the benefits include (but are not limited to):

• Flexible scheme. The range of SIP award types available allows you to tailor your scheme to the needs of your business and employees.
• Rewards participants on a tax-advantaged basis. SIPs are a tax-efficient way of incentivising employees. Under a SIP, each employee can receive up to £3,600 worth of free shares each year tax-free. This means that they receive the full value of the shares without having to pay income tax or National Insurance Contributions (NICs) on them. Partnership shares can be bought out of pre-tax/NICs earnings. The company can also choose to give employees up to two more free shares for each share that an employee buys (again, shares are bought out of pre-tax salary). In addition, if employees hold onto the shares they acquire through the plan for at least 5 years, no income tax and NICs are payable and the shares are also exempt from Capital Gains Tax for as long as they are held in the SIP Trust.
• Increases employee retention rates. Employees are more likely to feel valued, invested, and loyal to their employer if they have a financial stake in the company’s success. This can go a long way in reducing staff turnover and attracting highly skilled workers.
• Increases employee productivity and performance. By offering employees shares in the business, they take on a greater interest in the company’s success and are motivated to work harder to achieve this. This can lead to a more engaged workforce and increased innovation and productivity, which in turn benefits the overall success of the business.
• Attracts top talent. As competition for skilled workers continues to intensify, companies that offer an attractive SIP are likely to have a distinct advantage in attracting the best and brightest candidates in their field.
• Minimised risk. Because of the tax advantages, a SIP offers a relatively safe investment choice for shareholders, even in a private company.
• All-employee plan. Subject to certain qualifying service requirements, all UK resident employees in the relevant employing companies must be invited to participate in a SIP. This broad-based employee ownership model can help to engender a culture of shared ownership and engagement in the business.

Although there are no legal restrictions in place preventing companies from setting up their own Share Incentive Plan, we would strongly advise against it due to the various legal, tax and accounting implications and ongoing compliance of a SIP. There are also important compliance and administrative activities that need to be completed correctly to make your SIP legally compliant. You will also need to find a suitably knowledgeable firm or individuals to act as Trustees of the Share Incentive Plan.

Working with employee share scheme experts helps you ensure that your selected plan is not only a good fit for your business and employees, but that it is economically feasible and does not pose unnecessary financial risks. Having specialist legal knowledge on your side is also valuable when it comes to drafting plan documents, employee communication materials and SIP award contracts.