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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): Taxation: Tax advantages

If an employee receives free shares in the company they work for, they would usually have to pay income tax and NICs on them because they are considered to be part of their pay. If however, an employee participates in a Schedule 2 Share Incentive Plan, they will not have to pay tax and NICs on the value of the free and matching shares awarded under the SIP (Section 490(1)(a) & (2) ITEPA 2003), although there may be income tax and NICs due when the shares are removed from the plan depending on why the shares were removed and how long they were held in the plan (see below). The longer the shares are kept in the SIP, the less tax and NICs will be payable when the shares are taken out of the plan.

Schedule 2 SIP shares are held in a trust for a holding period (ETASSUM24130, ETASSUM24540 and ETASSUM24770) of at least 3 years, although the employer can increase this holding period up to five years. A participant can take their partnership shares out of the plan at any time, however they will normally have to pay tax and NICs on them if they withdraw them less than five years from the date they were bought.

To get the full income tax and NICs advantages, a participant will normally have to keep all the shares in the plan for at least 5 years (or three years for dividend shares).

If a participant keeps their shares in the plan until they sell the shares, they will not have to pay Capital Gains Tax (CGT) on the gain made, however much the shares increase in value. The following table assumes that the shares are not withdrawn from the SIP as a result of any of the “good leaver” provisions detailed at ETASSUM28160.

 

 

Type of share When shares acquired If shares withdrawn from plan during first 3 years If shares are withdrawn from plan during years 3 to 5 When shares are withdrawn from plan after 5 years
Free shares and Matching shares No income tax or NICs to pay on the value of shares (Section 490 ITEPA 2003) Income tax payable on the market value of the shares when they are withdrawn from the plan (Section 505(2) ITEPA 2003) Income tax payable on the lower of the market value of the shares at the time: -  
  • They are acquired, or
  • They are withdrawn from the plan
(Section 505(3) ITEPA 2003) No income tax or NICs to pay (Section 497(1) ITEPA 2003)      
  Partnership shares No income tax or NICs to pay on the money used to buy shares (Section 490 ITEPA 2003) Income tax payable on the market value of the shares when they are withdrawn from the plan (Section 506(2) ITEPA 2003) Income tax payable on the lower of: -
  • The pay used to buy the shares, or
  • The market value of the shares when they are withdrawn from plan
(Section 506(3) ITEPA 2003) No income tax or NICs to pay (Section 497(2) ITEPA 2003)        
  Dividend shares No income tax or NICs to pay on the dividends used to buy the dividend shares or the dividend shares themselves (Section 493 ITEPA 2003 & Section 770 ITTOIA 2005) Dividends used to buy shares are taxed as a dividend in the year the shares are withdrawn from the plan (Chapter 3 or 4 of Part 4 of Income Tax (Trading and Other Income) Act 2005 No income tax or NICs to pay (Section 497(3) ITEPA 2003) No income tax or NICs to pay (Section 497(3) ITEPA 2003)

 

 

 

 

Partnership shares can be withdrawn from the plan at any time. An employee’s Plan Shares have to be withdrawn from the plan when a participant leaves employment and as a result income tax charges might apply. The charges do not apply if the shares are withdrawn from the plan when a participant leaves employment for one of the “good leaver” reasons (refer to ETASSUM28160 - Section 498 ITEPA 2003).

No liability to income tax arises on the forfeiture of free or matching shares (Section 505(6) ITEPA 2003) if Sections 498 or 507 ITEPA 2003 applies.