SIP- Share Incentive Plan

 

Initially known as the all-employee share ownership plan, the Share Incentive Plan (‘SIP’) was introduced in Finance Act 2000 largely as a replacement for Approved Profit-Sharing plans which ceased in April 2001. The SIP legislation allows companies to deploy a made-to-measure approach in terms of how plans are designed with employees able to receive one of or a combination of the following:

·        Free Shares- Employers can give each employee free shares worth up to £3,600 each year which are free of income tax and national insurance so long as they are held in trust for 5 years.

·        Partnership Shares- Employees can use the lower of £1,800 a year or 10% of salary from gross salary to buy partnership shares. Employees enter into a partnership share agreement and choose how much they want to be deducted from their salary in agreement with the company. Shares may be bought each month or by an accumulation period which will be decided by the company.

·        Matching Shares- Employers can give free matching shares at a ratio of up to two matching shares for each partnership share bought by the employee. The same ratio must apply to all plan participants.

·        Dividend Shares- Employers can allow that any cash dividends paid on the SIP shares held in trust to be reinvested to purchase further shares. The company can choose to offer dividend shares on an optional or compulsory basis. There is no limit on the value that is reinvested, and the shares are not usually forfeitable.

The types of Plan shares listed above can be used in various combinations, for example, free Shares only, or partnership with or without matching shares, to suit the business needs of the company. Remember, if you are thinking about a SIP for your UK employees, you will require an onshore trust. However, most share plan administrators have established onshore trusts specifically for UK SIPs

 

As well as being able to choose between the above types of shares when building a plan, employers can also include other optional features such as:

 

·        Eligibility criteria- Companies may list a period of up to 18-month employment before employees become eligible to participate in a SIP.

·        Performance-related awards- Companies may link the award of free shares to performance measures.

Companies may make employees give up some or all of their free or matching shares if they leave within three years of the award date.

·        Holding periods- Free and matching shares must stay in the plan for at least three years, and for five years to ensure the participant has no tax liability outside of Capital Gains Tax. Dividend shares need only be held for three years before becoming tax-free.