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HMRC internal manual

Employee Tax Advantaged Share Scheme User Manual

HM Revenue & Customs
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Schedule 2 share incentive plan (SIP): Types of award: Free shares: Varying awards by reference to acceptable factors

All awards of shares under a Schedule 2 SIP must be made to participating employees on the same terms (paragraph 9(1)) but this requirement is not infringed where free shares are awarded by reference to an employee’s remuneration, length of service, or hours worked (paragraph 9(3)). Each of these factors is considered below.

The purpose of the same terms requirement is to ensure fair distribution of shares as between participants based on objective criteria. An objective formula is acceptable if the effects of this can be measured, for example allocations of shares that are directly proportional to remuneration and/or service. But any mathematical factor in a formula which is unrelated to remuneration, service or hours worked should be excluded if it may have the effect of allocating disproportionately more to the higher-paid employee or disproportionately less to the lower-paid employee. None of the factors must be applied in a way which produces a “nil award” (no shares) for any qualifying employee because the factors are not eligibility criteria.


There is no definition of “remuneration” in the SIP code. The term, therefore, has its ordinary meaning of earnings and in this context this should be taken to be earnings from the employment by reference to which the employee is eligible to participate in the Schedule 2 SIP. The period over which remuneration is measured depends on the interval(s) at which employees are paid but must be such that:

  • it is a reasonable measure of remuneration at the date of award, and
  • it does not discourage or disadvantage particular groups of employees (see ETASSUM21060).

If a percentage of earnings is to be awarded as a value of shares, the same percentage must apply to all participants. Alternatively, awards may be made by reference to bands of earnings, provided the bands are of equal width. For example:


Remuneration band £ Award
0-10000 50 shares
10,001-20,000 100 shares
20,001 or more 150 shares

Length of service

“Service” should be taken to mean employment with the current constituent company (although not in group circumstances). In a group plan (see ETASSUM20120) the company may wish to define service as continuous employment with any group company, either as defined by the Employment Rights Act 1996 or in accordance with a narrower definition to be included in the plan documents. These alternatives are both acceptable provided that other general requirements (such as the rule against discouraging features) are not infringed.

Hours worked

The purpose of this factor is to allow awards to be varied by reference to an employee’s contractual or conditioned hours of employment as a fraction or percentage of full-time hours. For example:


Full-time hours 40 per week
Maximum award of free shares (set by the company) £2000


An employee who works 20 hours per week is entitled to free shares to the value of

20/40 x 2000 = £1000

It is acceptable to calculate ‘hours worked’ over a period of 12 months ending with the date of award (or very shortly before it). If this method is adopted, it must not be used to exclude sickness absences or other authorised absences, which would not be in accordance with the purpose of the factor and could be regarded as a discouraging feature (see ETASSUM21060).

Multiple factors

Free shares can be awarded by reference to more than one of the factors mentioned above provided that each factor gives rise to a separate entitlement and a participant’s total entitlement is the sum of those separate entitlements (Paragraph 9(4)). This means that the entitlements cannot be multiplied together.

One way of using two or three factors is to allocate a value or a notional number of points to each factor and then to divide each pool among the participants according to a pre-determined basis which complies with the same terms requirement. For example:

if an entitlement to one point in the appropriation formula arises from each £5000 of remuneration and one point from up to 5 years of service (2 units for over 5 and up to 10 years etc), the following entitlements arise:


Remuneration £20,000 (4 points), service 6 years (2 points) entitled to 6 points
Remuneration £40,000 (8), service 2 years (1) entitled to 9 points


The company will decide the value of one point (in terms of either a number or value of shares to be awarded) according to the total shares available for award. This must be the same for all participants.

It would not be possible therefore to use the remuneration of an employee at a particular point of the year (i.e. on the last day of the tax year) and to then apportion the remuneration based on the number of months he was employed during the tax year because that would be multiplying the formulas together. It would have to be calculated based on his remuneration earned in that tax year to arrive at an entitlement (one formula) and the length of service to arrive at another entitlement factor (as in the example above). The award of free shares would then be allocated based on the total entitlement (which should then be awarded based on a consistent level of entitlement factor applied to all participants).