Last updated on:
March 17, 2024
A Share Incentive Plan (SIP) is a scheme offered by employers to their employees, allowing them to acquire shares in the company they work for, often at a favorable rate or even for free. SIPs are a way for companies to incentivise and retain employees by making them stakeholders in the company's success.
Tax Advantages of SIPs
- Income Tax and National Insurance Contributions (NICs) Exemptions: If you keep the shares within the SIP for a minimum of five years, you won't be taxed on them under Income Tax or NICs. This means the value of the shares at the time they are awarded to you is protected from tax, provided the shares remain in the plan for the required period.
- Capital Gains Tax (CGT) Exemption: Similarly, if you sell the shares after they have been in the SIP for five years, any increase in their value is exempt from CGT. This makes SIPs an attractive option for long-term financial planning and investment.
Types of Shares in SIPs
- Free Shares: Companies can award up to £3,600 worth of shares to their employees each tax year without any charge to Income Tax or NICs, subject to the shares being kept in the plan for five years.
- Partnership Shares: Employees can purchase shares out of their pre-tax salary, up to £1,800 or 10% of their annual income, whichever is lower. This effectively reduces their taxable income and offers a way to invest directly in the company they work for.
- Matching Shares: For every partnership share an employee buys, the employer can give them up to two matching shares, maximizing the benefit to the employee and encouraging participation in the scheme.
- Dividend Shares: If the company pays dividends on shares held within the SIP, these dividends can be reinvested to purchase additional shares. As long as these dividend shares are held for three years, they benefit from the same tax exemptions as other SIP shares.
Conclusion
SIPs offer a tax-efficient way for employees to invest in the company they work for, aligning their interests with the company's success. The tax advantages make SIPs an attractive component of an employee's compensation package, contributing to employee retention and motivation.
