Share Incentive Plans (SIPs)
This is the most tax efficient scheme (although with a heavy administrative burden). Employers receive Corporation Tax relief for establishing, contributing to and administrating the SIP. The SIP must be open to all eligible employees.
There are three main types of plan:
• employers can give staff up to £3,000 worth of free shares a year;
• each year, employees can buy a further £1,500 worth of partnership shares from their gross salary, or up to 10 per cent of gross salary, whichever is less; and
• employers can give up to two matching shares for every share the employee buys.
All shares are held in a trust. Share dividends can also be held in the trust. Dividends worth up to £1,500 in any given tax year can be reinvested in new shares, as long as they are held for a minimum of three years.
No income tax or National Insurance Contributions (NICs) are payable if the shares are held in the SIP for five years. Shares are free of capital gains tax (CGT) when they are taken out of the trust. If shares are taken out of the trust after five years and then sold at a later date, CGT may be payable on any increase in value between the date when the shares were taken out of the trust and the date of sale.
If employees leave the business before shares have been held in the SIP for five years, they:
• must pay income tax and NICs; and• may have to part with free shares and matching shares.