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HMRC internal manual

Employee Tax Advantaged Share Scheme User Manual

Schedule 2 share incentive plan (SIP): Types of award: Partnership shares: Deductions from salary

A partnership share agreement is to be given effect by deductions from an employee’s salary.  These deductions are referred to as partnership share money. See ETASSUM26150 for details of the trustee’s obligations in relation to this money.

‘Salary’ is defined for this purpose by paragraph 43(4):

a. In the case of an individual with earnings chargeable to UK income tax, such of the earnings of the eligible employment:

  • as are liable to be paid under deduction of tax under PAYE regulations, after deducting any amounts included by virtue of the benefits code EIM20006, or
  • as would be liable to be so paid apart from the SIP Code (that is, ignoring deductions of partnership share money), or

b. In the case of an individual without earnings chargeable to UK income tax, such of the earnings of the eligible employment as would be liable to deduction of tax under PAYE if they had been within the scope of UK tax.

‘Earnings’ has the same meaning here as it does elsewhere in ITEPA 2003 – see ETASSUM28200

Payments which qualify as a deduction from earnings before PAYE is applied, such as qualifying pension contributions and Give As You Earn contributions, are to be deducted from salary for this purpose.

The Universal Credit Regulations 2013 at paragraph 55 states that the following benefits are to be treated as employed earnings:

  1. Statutory Sick Pay,
  2. Statutory Maternity Pay,
  3. Ordinary Statutory Paternity Pay, and
  4. Statutory Adoption Pay.

Further guidance with regard to taxable social security benefits can be found in the Employment Income Manual at EIM76101.

Stopping and restarting deductions

A participant can stop deductions at any time by giving notice to the company in writing (paragraph 54). Having stopped deductions, the employee can resume them by giving notice to the company in writing but the Schedule 2 SIP must provide that an employee cannot make up missed deductions (paragraph 54(3)). A Schedule 2 SIP may prevent employees from restarting deductions more than once during the accumulation period (paragraph 54(4)).

Where the company receives notice that an employee wishes to stop deductions, the deductions must cease within 30 days of receiving the notice, unless a later date is specified in the notice. Similarly, in the case of a notice to restart deductions, deductions must recommence within 30 days of receipt unless the employee specifies a later date in the notice, (paragraphs 54(5) and (6)).

It is often more convenient if stop and restart notices are given directly to the SIP administrator rather than to the company and the administrator may provide forms for this purpose. This practice is acceptable provided that a participant’s statutory rights to give notice to the company are not excluded.