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HMRC internal manual

Employee Tax Advantaged Share Scheme User Manual

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HM Revenue & Customs
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Schedule 2 share incentive plan (SIP): Introduction - Types of award

A Schedule 2 SIP can include awards of Partnership shares, Free shares, Matching shares and Dividend shares, although the company can choose which types of award to include: -

  • Employees can enter into a Partnership Share Agreement to buy Partnership Shares out of pre-income tax and pre-NIC salary. The maximum pre-tax and pre-NIC salary that can be used to buy Partnership Shares is £1,800 per annum or 10% of the employee’s salary for the tax year (whichever is the lower amount).
  • Employees can also receive awards of shares including one only or a combination of;

 

  • Free Shares (which may be performance-related awards). The maximum value of Free Shares per tax year is £3,600,
  • Matching Shares. Companies can match employee’s partnership share purchases by giving them additional shares. The maximum award of Matching Shares is 2 Matching Shares for each Partnership Share bought.
  • Free and Matching Shares must normally be held in trust by the trustees in the name of the employee for a period of 3-5 years (set by the company). At the end of that time, employees can sell the shares if they wish.

The Plan operates with a trust funded by the company, which will acquire and hold the shares in the SIP on behalf of the participants until such time as they are no longer part of the SIP.

Employers can provide for cash dividends on shares held in the SIP on behalf of the participants to be reinvested, tax-free, in more shares in the plan. These “Dividend Shares” must normally be held in the trust for a period of 3 years. At the end of that time, employees can sell the shares if they wish. There are no longer (with effect from 6 April 2013) any statutory limits on the amount of dividends that can be reinvested, although companies can impose their own limits.

To qualify for tax advantages the Company must notify the scheme to HMRC and self-certify that the SIP meets the requirements of Schedule 2 Income Tax (Earnings and Pensions) Act 2003 within the appropriate time limits in the prescribed manner (refer to ETASSUM20110).

Tax Relief

  • Income tax and NICs are not chargeable when shares are awarded to or acquired for participating employees.
  • Employees who keep their shares in a plan for 5 years pay no income tax or NICs on those shares.
  • Employees who take their shares out of the plan after 3 years will normally pay income tax and NICs on no more than the initial market value of those shares – any increase in the value of their shares while in the plan will be free of income tax and NICs.
  • Employees who take their shares out of the plan within 5 years because they are leaving the company for a “good leaver” reason (refer to ETASSUM28160) will pay no income tax or NICs on their shares.
  • Employees who sell their shares will be liable to capital gains tax (CGT) on any increase in the value of their shares after they have come out of the plan. CGT is not chargeable on the increase in value of the shares whilst they remain in the plan. 
  • Existing shareholders who want to sell their shares to a new plan trust to be used for the benefit of employees, may be able to benefit from a CGT rollover relief (Part 1 of Schedule 7D Taxation of Chargeable Gains Act 1992).
  • Employers will get corporation tax relief for the costs of setting up and running the plan, including the cost of Free and Matching shares, and the cost of providing Partnership shares to the extent that this exceeds contributions received from employees.
  • Employers will not pay employer’s NIC where the shares are held in the plan for 5 years.
  • NICs are not chargeable in respect of dividend shares.