Interested in setting up Share Incentive Plans in your company? Then look no further…

The benefits of a Share Incentive Plan cannot be overstated. In fact, not only does it provide incentives for employees to work harder, it is one of the most tax-advantaged schemes available in the UK at the moment.

Whether you’re delving into the world of Employee Ownership for the first time, or you are a seasoned business owner, it is vital to get to grips with the complexities of Share Incentive plans to minimise risk and maximise gain. So, where do we start?

In this post, we set out what Share Incentive Plans are, and how they work, so you can get to know them a little better. We’ll then delve into their benefits and drawbacks, so you can start assessing whether this form of Employee Ownership is right for you and your employees. Take a look…

What are Share Incentive Plans?

Share Incentive Plans (SIPs) are a type of Employee Ownership that allows companies to flexibly transfer free or discounted shares to their employees. Amongst other things, these are a tax-advantaged scheme that allows a business to transfer free and/or discounted shared to its employees. In fact, in 2014, Share Incentive Plan legislation was changed to remove the need for HMRC approval; this means that you can set up your SIP and start reaping tax benefits straight away.

Because of this, SIPs can have significant tax benefits for both employers and employees – a reflection of the Government’s eagerness to promote Employee Ownership business models in the UK.

The main rules on Share Incentive Plans can be found in the HMRC Employee Tax Advantaged Share Scheme User Manual. However, in summary, there are three main methods of awarding shares which can be utilised depending on the individual needs and goals of your company:

Free Shares

Through this method, your employees can receive free shares of up to £3,600 per tax year. Every employee who receives free shares must receive them on similar terms – they must gain the same number of shares or the allocation criteria must be broadly objective. For example, it could be based on length of service or performance.

If the employee leaves the business within three years from the date they receive the shares, they may have to forfeit them. The exception to this is if they are classified as a ‘Share Incentive Plan good leaver’ (see below). If the employee leaves the business within five years, tax relief will be limited.

Partnership Shares

Employees can be invited to buy Partnership Shares which are paid for via salary pre-tax and National Insurance Contributions (NIC). You can allow deductions of up to £1,800 or 10 percent of the employee’s salary each year (whichever is lower). The company will save employer’s NIC on these deductions.

Matching Shares

If your company offers Partnership Shares, you can also offer up to two Matching Shares for each Partnership Share purchased (up to a maximum of £3,600). Typically, Matching Shares must also be held in trust for between three to five years to be eligible for full tax relief. If the employee withdraws their Partnership Shares within three years, they must forfeit the Matching Shares unless they are a ‘good leaver’.

Other Things to Know About SIPs

Before we move on, it’s important you know as much as there is to know about these sorts of share plans. So, some other important aspects of it all include:

Reinvesting Dividends

Any dividends received on SIP shares may be reinvested into further shares. There is no limit on the value of dividends the employee can reinvest, although Dividend Shares must be held in trust for between three to five years to be eligible for full tax relief.

SIP Eligibility

You can set up a Share Incentive Plan if you are either a listed or unlisted company. SIP shares must be open to all employees, although you can limit access until they have worked for the business for up to 18 months. Shares may also be awarded according to objective performance criteria.

What is the Employee’s Share Incentive Plan Tax Position?

When employees purchase Partnership Shares, the money is deducted from their pre-tax salary. No NIC or Income Tax falls due if the shares are held in trust for at least five years. The only exception to this is in cases of certain ‘good leavers’.

If the employee releases the shares from the Share Incentive Plan trust after five years and sells on the same day, they will not have to pay any Capital Gains Tax. The base cost of shares withdrawn from the trust, for the purposes of Capital Gains Tax, is the market value of the withdrawn shares.

Capital Gains Tax upon sale is then calculated according to any increase in value after they have been withdrawn. Employees may transfer the shares (up to £20,000) into an ISA within 90 days of release to negate further capital gains.

If the employee withdraws the shares from the trust within three years of the date they received them, they will have to pay Income Tax and NIC on the market value of the shares as of the date of withdrawal. If the employee withdraws the shares between three and five years, they will either have to pay Income Tax and NIC on the amount of salary deducted to pay for the shares, or the market value of the shares upon withdrawal (whichever is lower).

What is the Employer’s Share Incentive Plan Tax Position?

As an employer, you also benefit from tax relief through these share plans. Firstly, you save NIC contributions on the Partnership Shares your employee purchases. You are also entitled to relief from Corporation Tax for:

The proportion of employee’s salary used to buy the Partnership Shares.
Any additional costs incurred while providing Partnership Shares.
The market value of any Free Shares and Matching Shares when acquired by the SIP trust.
The costs of setting up and running the SIP.

Therefore, running a SIP can be extremely advantageous for employers in terms of tax savings.

What is a ‘Good Leaver’?

Good leavers may be able to take advantage of the generous tax reliefs even if they withdraw their shares from the SIP trust within three to five years. Good reasons to leave include:

Injury
Death
Retirement
Redundancy
Disability
TUPE (transfer of undertakings)

If the business is taken over and the employees are offered cash for their shares, this is also a good reason to withdraw them.

What are the Benefits of a Share Incentive Plan?

Share Incentive Plans are one of the most tax-advantaged and flexible share schemes available in the UK. The following are just some of the ways your company could benefit from a Share Incentive Plan:

It will give your employees a vested interest in the success of the business, so has the potential to inspire and motivate them to work harder and fulfil their potential.
You are more likely to retain talent for longer; employees will only receive their full tax benefits if they keep their shares in the SIP trust for five years so they have strong incentive to stay with the business for at least this length of time.
SIPs are a great way for start-ups and small businesses to attract the best talent, especially if you cannot yet offer the most competitive salaries on the market.
The ability to reinvest unlimited dividends back into the company free of Income Tax and NIC at the point of purchase encourages employees to help the company continue to grow and promote its long-term success.
You do not need to obtain HMRC’s approval before proceeding with a Share Incentive Plan. It is up to you to set up the scheme. Then, you must simply notify HMRC by 6th July the following tax year.
The structure of Share Incentive Plans means there is minimal risk for everyone involved.

Are There Any Drawbacks to Share Incentive Plans?

Implementing a Share Incentive Plan will likely be a significant change to the structure of your business. Therefore, it is important to take into account the practical considerations to avoid introducing a scheme that does not align with your business goals:

There will be costs associated with introducing a Share Incentive Plan (as there are with any Employee Ownership scheme) as well as its ongoing management. However, your business can receive some relief from Corporation Tax for these costs.
As your company grows, the value of your employee’s shares can become diluted, which can make the scheme less attractive to new and existing members.
As a direct form of Employee Ownership, the employees may acquire rights to participate in the governance of the company. However, it is possible to subject shares to certain conditions, such as to limit voting rights.
If awards of shares are to be linked to performance, you must ensure that your evaluation procedures are objective and free from bias. Otherwise, the business could open itself up to legal claims.

How to Get Started with Share Incentive Plans

As we’ve seen, setting up a Share Incentive Plan can have enormous benefits for your business in terms of tax advantages, growth, and employee engagement and motivation. However, there are also many practical considerations that must be taken into account; as well as the drawbacks outlined above, you must think about factors such as:

Obtaining approval from your existing shareholders;
Amending the company’s Articles of Association;
Getting the shares valued;
Consulting with your employees;
Administering the plan;
and providing consistent, ongoing support.

Therefore, seeking the right legal advice is absolutely essential to ensure the plan is set up correctly and to avoid any pitfalls, such as inadvertently embedding unconscious bias into your share award criteria. A solicitor who specialises in Share Incentive Plans and other forms of Employee Ownership is the right choice to ensure that your scheme is designed, implemented and administered with the best interests of your company and your employees at heart.