Definition
A Share Incentive Plan (SIP) is a type of share scheme used primarily by British companies to provide employees and executive directors with the opportunity to acquire company shares in a tax-advantaged manner. Under this scheme, a trustee acquires shares on behalf of employees, who then benefit from various tax breaks. The core requirement for tax advantages is that the SIP must be open to all employees and executive directors of the company.
Examples
-
Free Shares: A company may give ‘free shares’ to employees without any cost, up to a certain limit annually, which employees do not pay tax or National Insurance on unless conditions are broken.
-
Partnership Shares: Employees can buy shares out of their pre-tax salary, allowing them to acquire shares at a tax-efficient rate.
-
Matching Shares: The company may offer up to two matching shares for every partnership share that the employee purchases.
-
Dividend Shares: Employees can use dividends from shares they own within the SIP to buy more shares.
Frequently Asked Questions
What is the primary benefit of a SIP?
The primary benefit of a SIP is that it allows employees to acquire shares in their company on a tax-advantaged basis, often without having to pay Income Tax or National Insurance Contributions on the shares, provided certain conditions are met.
Who is eligible to participate in a SIP?
Eligibility for a SIP typically includes all employees and executive directors of the company. The plan must be open to all employees on equal terms to receive tax advantages.
How long must shares be held in a SIP to maintain tax advantages?
Shares need to be held for a specified period, usually five years, to fully qualify for the tax advantages available under a SIP. If shares are removed before this period, some or all of the tax benefits may be lost.
What happens if I leave the company before the five-year holding period ends?
If an employee leaves the company before the completion of the five-year holding period, the tax treatment may differ based on the reason for leaving. Some reasons like retirement, redundancy, or injury may still allow retaining the tax benefits.
Related Terms
Employee Share Ownership Trust (ESOT): A trust established to hold shares in a company for the benefit of the employees. It aims to promote employee ownership by distributing shares to employees.
Executive Share Option Plan (ESOP): A share option scheme aimed specifically at senior executives, allowing them to purchase shares in the company, often at a discount.
Company Share Option Plan (CSOP): A tax-advantaged schedule under which companies grant share options to employees, encouraging investment and long-term commitment to the organization.
Online Resources
- HMRC - Share Incentive Plan
- The Employee Ownership Association
- Institute of Chartered Accountants in England and Wales (ICAEW)
Suggested Books for Further Studies
- “Employee Share Ownership Plans: International Research on Policy and Practice” by Andrew Pendleton and John Michie
- “Shareholder-Designed Plans and Allocation Performance” by Dirk Hackbarth
- “Reward Management: A Complete Guide to Compensation Strategy and Practice” by Michael Armstrong and Helen Murlis
Accounting Basics: “Share Incentive Plan (SIP)” Fundamentals Quiz
Thank you for exploring the comprehensive details involving Share Incentive Plans and improving your knowledge through our structured, thoughtful quizzes!
