Share Incentive Plans (SIPs)
A SIP enables employees to acquire and hold shares in their employing company in three ways:
|Partnership Shares||Employees contribute up to £1,800 per year to buy shares. Contributions are from salary before deduction of income tax and NICs, which means the shares cost less in net salary.|
|Matching Shares||Companies can, if they wish, match each Partnership Share by awarding up to two Matching Shares – ie worth up to £3,600 per year. There is no income tax or NICs charge at the award date.|
|Free Shares||A further £3,600 worth of Free Shares can be awarded to each employee every year, either on the same terms or with reference to performance of business units. There is no income tax or NICs charge at the award date.|
In addition, dividends paid on shares held in the plan can be reinvested.
All UK-resident employees must be eligible to participate if they have been employed for a qualifying period (not exceeding 18 months).
The shares are held on behalf of employees in a trust and no income tax is payable on the shares if they are left in the plan for five years. The shares are also free from capital gains tax (CGT) on any increase in their value while they are held in the plan.
SIPs are therefore very tax-effective plans which can be adapted easily to meet a wide range of companies’ objectives.
SAYE or Sharesave Share Option Schemes
A Save-As-You-Earn Share Option Scheme, often known as Sharesave, combines a Share Option with a savings contract, so that employees can save the funds to buy shares in their company.
Employees are invited to save a regular amount between £5 and £500 each month with a bank or building society by deduction from their (after tax) pay for a period of three or five years.
When employees start the savings contract, they are granted options over the maximum number of shares which can be bought with the total prospective savings at the end of three or five years. The price to be paid for the shares (the exercise price) can be discounted up to 20% below the share price at the date of grant of the option.
All UK-resident employees who meet a length of service requirement (not exceeding five years) must be invited to participate in each offer on similar terms.
No income tax is payable on grant of the option or when it is exercised (except in certain exceptional circumstances). There is no NICs liability.
On disposal of the shares there is a potential CGT liability on the difference between the market value of the shares on disposal and the price paid for the shares. However, for many employees the gain will come within the annual CGT exemption (£11,100 for 2015-16).