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In today’s competitive employment market employers in many sectors are gearing up to provide desirable perks and benefits to attract and retain talent. One way for companies to bring the most highly-skilled talent on board is to offer a Share Incentive Plan (SIP). 

In this article, we explain what a SIP is and the advantages it can confer on both employees and employers.

What is a Share Incentive Plan?

Providing attractive tax advantages, SIPs allow a company to invite select employees to purchase shares which are held in a unique Employee Benefit Trust (EBT).

SIPs do involve set-up and administration costs. However, if you are in a position to implement such a plan, you can be confident that they are popular with employees.

What is an Employee Benefit Trust?

An EBT is a trust set up specifically to hold assets to benefit employees and sometimes ex-employees and employees’ dependents. You will need to appoint trustees and notify HMRC of the name and address of the settlor (your company) and the trustees. This notice must be filed within three months of the date of establishing the EBT.

How do Share Incentive Plans work?

Shares can be awarded to eligible employees in three ways:

  • Free shares - your employees can receive free shares of up to £3,600 per tax year. You can divvy up allocations by performance (individual, business unit, or corporate) so long as the measures used are objective. An employee may be required to give up their shares if they leave the company within three years unless they qualify as a ‘share incentive plan good leaver’ (see below). Resigning from the organisation within five years can limit the amount of tax relief available.
  • Partnership shares – eligible employees can purchase shares out of their pre-tax income via salary deduction. Partnership shares can be bought up to a maximum of the lesser of £1,800 per year and 10% of pay.
  • Matching shares – if you award partnership shares your company can also offer two matching shares for each purchased partnership share up to a maximum of £3,600. These shares must be held in trust for two to five years to qualify for tax relief.

What are the benefits of a share incentive plan?

SIPs can:

  • Help tie employees to the organisation thereby aiding staff retention strategies. In addition, employees must usually stay for five years to receive full tax-benefits
  • Employees are invested in the company’s performance and therefore motivated to hit KPIs
  • Employers will save on tax and national insurance if they choose to award partnership shares
  • Employees can reinvest dividends into additional share purchases
  • For startups who cannot afford to pay high salaries, SIPs provide an avenue to attract skilled talent
  • SIPs are relatively risk-free

Are there tax implications to joining a Share Incentive Plan?

For employers

Corporation tax deductions can be applied to:

  • Setting up and administering the SIP
  • As long as the recipients are UK residents, the market value of free and matching shares at the time they are awarded

For employees

  • Awards of free or matching shares are income-tax exempt at the time they are awarded
  • Income tax and Class 1 NICs are not payable on an employee’s pay deduction when that deduction is used to purchase partnership shares
  • Cash dividends reinvested in dividend shares are exempt from income tax
  • If shares are held in an EBT trust and sold directly from the trust, no capital gains tax will apply
  • If an employee owns more than 10% of the company through a SIP, further tax benefits may apply

What is a ‘good leaver’?

If an employee leaves who benefits from a SIP for a ‘good reason’ they may still be entitled to full tax relief even if they withdraw their shares from the SIP trust within three to five years. Good reasons include:

  • Redundancy
  • Disability
  • TUPE (transfer of undertakings)
  • Injury
  • Death
  • Retirement

Get legal assistance from LawBite

Our corporate and employment law solicitors can assist you with every aspect of setting up a SIP. We will ensure the process is legally compliant and you and your employees fully understand the plan you have chosen and the advantages available. In addition, we will advise you on setting up and administering an EBT trust.

LawBite has helped thousands of business owners and SMEs achieve their commercial ambitions and regulatory compliance. To find out how we can support in setting up an employee share scheme, from drafting the rules to reviewing your agreement - book a free 15 minute consultation or call us on 020 3808 8314.


Additional resources

In closing

Nothing in this article constitutes legal advice on which you should rely. The article is provided for general information purposes only. Professional legal advice should always be sought before taking any action relating to or relying on the content of this article. Our Platform Terms of Use apply to this article.

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