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The Share Incentive Plan (SIP)
The Share Incentive Plan (SIP) is a tax-advantaged, all-employee plan. It provides an avenue for UK companies to award equity to their employees in a flexible manner.
What are the main aims and objectives?
The central aims and objectives of SIP are to motivate and retain talented employees by fostering a sense of ownership and encouraging a long-term commitment to the company. Additionally, the scheme is designed to be tax efficient in order to motivate participation in the scheme. SIPs also encourage long-term commitment from employees as there are tax advantages for holding the shares for at least five years. This provision intends to align the interests of the employees with those of the company over the long term
How does the program work?
SIP is a tax-advantaged, all-employee plan that allows companies to award equity to employees. It operates through four key elements: free shares, partnership shares, matching shares, and dividend shares.
Free shares are awarded by the company, with employees eligible to receive up to £3,600 worth annually. Partnership shares are bought by employees using their pre-tax salary deductions. Employers can offer matching shares, providing up to two free matching shares for each partnership share. Dividend shares are acquired when dividends received on SIP shares are reinvested into additional shares.
The shares are held in a trust for a minimum of five years to obtain tax advantages. If the shares are kept in the plan for this period, employees can avoid income tax and National Insurance Contributions (NIC). Employers, on the other hand, can receive relief for certain costs linked with the plan.
Capital Gains Tax is not applicable if shares are sold while still in the plan. However, if shares are taken out of the plan and sold later, Capital Gains Tax may be owed if their value has increased. If dividend shares are kept for at least three years, Income Tax can be avoided. But, removing shares early from a SIP incurs Income Tax and National Insurance.
In order to be eligible for a SIP, the shares used must be ordinary shares in a listed company or a company not controlled by another listed company. Additionally, all employees in the UK must be invited to participate on the same terms.
Setting up a SIP involves establishing a trust where the shares will be held. Management of a SIP includes tracking the allocation of shares to employees and their sale or withdrawal.
What is the overall cost?
SIP costs £210 million per year in lost revenue through income tax and national insurance contributions.
How was it implemented?
SIP was introduced in 2000 by Her Majesty’s Revenue and Customs (HMRC) which is a non-ministerial department of the UK Government responsible for the collection of taxes. A key milestone in the development of the SIP was in April 2014 when the HMRC approval for tax benefits was no longer required. This change made the SIP even more attractive for companies and employees, as it simplified the process and allowed for greater flexibility.
SIP is one of four main tax-advantaged employee share schemes available in the UK. The other schemes are: save as your earn scheme (SAYE), Company Share Option Plans (CSOP), and Enterprise Management Incentives (EMI).
What impact has been measured?
In the tax year ending 2021:
- £780 million worth of options were granted
- £420 million worth of relievable gain was exercised
An impact assessment commissioned by HMRC of CSOP, SIP and SAYE in 2021 found that:
- More than 1,200 companies have operated one of the three schemes since 2015
- 268 of these companies offer CSOP, making it the second most popular scheme of the three
- Out of all surveyed companies that are aware of being registered for CSOP, SIP or SAYE, 81% indicated an improvement in employment and/or business outcomes
- 74% of companies surveyed reported a positive impact on recruitment and/or staff retention (69% for staff retention and 48% for recruitment.
- Being registered for SIP has a positive impact on turnover with registration in the scheme being associated with a 6.1% higher turnover than firms in the control group
- Registering in SIP had no statistically significant impact on the number of employees
- There is some evidence of a positive impact of share schemes on employee saving behavior
What lessons can be learned?
While the Share Incentive Plan (SIP) in the UK offers several advantages, it's crucial to consider its limitations:
- Firstly, the SIP requires employees to hold the shares in the trust for at least five years to reap the full tax benefits. This long-term commitment might discourage some employees, especially those who prefer immediate financial rewards over long-term gains.
- Secondly, the SIP is dependent on the financial performance of the company. If the company does not perform well, the value of the shares may decrease, leading to potential losses for the employees. This exposes employees to financial risks.
- Thirdly, the SIP may not be suitable for all companies. Smaller or start-up companies may not have the financial capacity to offer such a scheme, and the administration of the plan might be complex and costly
In addition to this the HMRC evaluation found that:
- Awareness of the schemes was limited with 55% of firms reporting that they were unaware of having operated one of the schemes in the last 10 years
- Companies typically opt into share schemes to improve employment outcomes with the most popular motivation being to create a feeling of ownership (50%), help retain staff generally (32%), retain skilled employees (24%), attract skilled employees (21%) and improve staff morale (26%).
- Employees mostly participated in share schemes in order to save.
- Non-claimant companies perceived the process of setting up and administering the scheme as complicated and difficult and consequently saw this is a major barrier to participating
- In particular some small companies felt the scheme was not suited to them due to challenges relating to controlling interest, financial risk to employees, valuing company shares or liquidity issues when buying back shares.
