Partner Article

Are share incentive plans right for your business?

We’ve all seen the breakdown of top executive’s bonuses and wept quietly (or loudly) into our pillows. The salary and cash bonuses are handsome enough, but the share options often dwarf even these. Employee share schemes are nothing new, but have tended to be seen as the preserve of major corporations. However, thanks to the Government’s Share Incentive Plan, it could make sense for you to offer shares to your employees.

The Share Incentive Plan (SIP) is a tax-efficient employee share plan which allows employers to offer shares in the company to all of their employees and which must be approved in advance by the HMRC. These shares are held in a trust funded by the employer until the employee chooses to remove their shares from the plan or leaves their position.

But what makes an SIP so attractive to employees? Under ordinary circumstances they would have to pay tax and National Insurance on shares, as they are viewed as remuneration. Under an SIP employees can end up paying less or no income tax and NI on the shares. How much income tax and NI is paid depends on the type of shares purchased and the amount of time they are left in the trust.

The types of shares are:

1. Free Shares. Given to the employee up to a maximum value of £3000 per tax year. To receive full income tax and NI exemption these must be held in trust for five years. If withdrawn before then they are eligible for some income tax and NI.

2. Partnership Shares. These are bought by the employee with pre-tax earnings. The maximum value is £1500 (or 10% of salary if lower). These are subject to the same tax relief as free shares.

3. Matching Shares. These shares are given by the employer to match each share purchased by the employee with a maximum ratio of two matching shares to one partnership share. These are also subject to similar tax payments as the previous shares.

4. Dividend Shares. If an employee has shares in the SIP they can use the dividends paid on those shares to purchase additional shares, and they then pay no tax or NI on those dividends, up to a maximum of £1,500 each year. They pay no income tax or NI on these shares after three years.

Provided the employee holds the shares in the trust for the requisite period of time, the employee can sell the shares and will only be subject to capital gains tax (18% for a basic rate tax payer) rather than income tax and NI.

But the benefits aren’t just for the employee. As long as certain conditions are met, the employer can claim relief from Corporation Tax for the cost of the shares awarded to employees, and is also exempt from employer national insurance contributions on shares given to, or purchased by, employees under the SIP. And although the costs involved in setting up an SIP can be quite large, some of the expenses may also be eligible for relief against corporation tax.

However, it’s important not to think purely in financial terms. By allowing employees to purchase shares from the company and benefit from the tax breaks, a SIP can foster and improve staff loyalty and reduce employee turnover. It will also help to incentivise staff without any immediate cash outlay, and it could align employee and shareholder aims, as both will benefit from the company’s shares price increasing.

If your company has a decent number of employees and you’re expecting company growth over the next few years, and an accompanying rise in share values, then you should seriously consider an SIP. A good chartered accountancy firm that offers corporate tax services can help you to understand the nitty-gritty and find out if an SIP is right for you.

Find out more about the Share Incentive Plan by visiting http://www.hwfisher.co.uk/images/stories/docs/shareincentiveplan.pdf

This was posted in Bdaily's Members' News section by HW Fisher .