Schedule 2 share incentive plan (SIP): Taxation: Introduction
Schedule 2 Share Incentive Plans (SIP) give employee’s tax and NICs advantages when they buy or are given shares in the company they work for (refer to Sections 488 – 515 Income Tax (Earnings and Pensions) Act 2003).
If a company sets up a Schedule 2 SIP, it can choose to offer qualifying employees one or a combination of four types of plan shares: -
- Free shares (ETASSUM24100),
- Partnership shares (ETASSUM24300),
- Matching shares (ETASSUM24500), and
- Dividend shares (ETASSUM24700).
The employee is not liable to income tax on the beneficial interest in the shares (under the Schedule 2 SIP) that passes to the employee at the time of the award or acquisition (Section 490 ITEPA 2003).
The employer can award up to £3,600 worth of free shares in any tax year (a tax year runs from 6 April to 5 April).
An employer may link awards of shares to employees’ performance, for example:
- The performance of the employee, or
- The performance of the employee’s team, division or other work unit.
A qualifying employee can buy partnership shares from their gross pay. An employee is limited on how much can be spent on partnership shares, being the lower of:
- £1,800 per tax year, or
- 10% of their total salary for the year.
The employer can specify whether all or only part of the employee’s salary is to be used when calculating the maximum percentage of salary to be spent on partnership shares, i.e. a scheme may exclude a particular description of earnings such as overtime or bonus payments.
Buying shares using an employee’s gross pay means that they will not have to pay income tax or National Insurance Contributions (NICs) on the money used to buy the shares (Section 492 ITEPA 2003).
If a participant buys partnership shares, the employer can match them by giving up to two free (matching) shares for every partnership share bought. The plan rules will specify whether the SIP offers matching shares.
As a shareholder, the participant in a SIP may be paid dividends on their shares.
If a dividend is received in respect of the free, partnership or matching shares, the employer may allow the participant to use those dividends to buy more shares, to be held in the plan. These are dividend shares and the participant will not have to pay tax on these reinvested dividends as long as the shares bought with the dividends are held in the plan for at least three years (Section 493 ITEPA 2003).
If a participant does not use the dividends received from their plan shares to buy more shares in this way, they will be taxed in the same way as other dividends and if the participant is a higher rate taxpayer, they will need to enter the details on their Self Assessment Tax Return.
A participant in a Schedule 2 SIP must keep full records of their participation in the SIP, i.e. they must keep a record of when they were awarded free or matching shares and when they bought partnership shares. This is because they might have to pay income tax or NICs if they leave the company or remove their shares from the SIP within 5 years.