Loading ...
(1 votes, ave: 3.00 / 5 )
Loading ...Share Incentive Plans (SIPS)
Posted:Abigail Andrews – Tuesday, June 26th, 2007
As with share save schemes if your employer offers SIP's then you should again seriously consider investing. Here's why...
What are Share Incentive Plans?
A variation on the Sharesave idea was introduced in 2000 known as Share Incentive Plans (SIP's). There are a number of Share Incentive Plans up and running and but no particular plan is as yet identified as the ideal template. That's because unlike the traditional employee share plans, SIPs have flexibility as part of their design brief. SIPS offer tax and National Insurance breaks to employees provided that they hold shares in their employer for five years.
Eligibility for SIP's
Share Incentive Plans are all-employee plans, so they cannot be restricted to particular groups or individuals. However, companies can exclude employees who have not worked for the company for a minimum period of time. Individual companies can set their own minimum limit, but it cannot be longer than 18 months.
- Part-time employees have the same rights to join as full-time employees.
- You can take part right up to retirement. Income tax and National Insurance advantages will remain in place if you take your shares out of the plan early because you retire at or after the age specified in the plan rules.
How do SIP's work?
How a SIP works is determined by what suits a company best. It can choose to offer you one or a combination of four types of plan shares. These types are described in the table below:
| Share type | Maximum Allowed | Description |
| Free | ﾃつ｣3,000 |
ﾃつ｣3,000 worth of free shares, free from tax and National Insurance Contributions. An employer may link awards of shares to its employees' performance, for example, individual performance, team or division performance, length of service, hours worked or level of pay. All employees must be invited to take part in the award on the same terms but awards may be varied depending on remuneration, length of service, hours worked or performance (targets must be fair, objective measurable and achievable). Free Shares have a Holding Period set by the employer of 3-5 years. However, in order to be sold free of income tax and NIC liability the shares must remain in the plan for 5 years. |
| Partnership | ﾃつ｣1,500 |
You can buy partnership shares using your gross pay. However, the limits on how much you can spend on partnership shares are the lower of:ﾃつ｣1,500 per tax year, or 10% of your total salary for the tax year. Your employer may specify whether all or only part of your salary is to be used when calculating the maximum percentage of salary to be spent on partnership shares. For example a scheme may exclude a particular description of earnings, such as overtime or bonus payments. Buying shares using your gross pay means that you will not have to pay income tax or National Insurance contributions (NICs) on the money that you use to buy them. Partnership shares do not have a Holding period and can therefore be removed from the plan at any time, however the sale of Partnership Shares may result in the forfeiture of some or all of the linked 'Matching Shares' which have not been held for the relevant Holding Period. In order to be sold free of income tax and NIC, Partnership Shares must remain in the plan for 5 years from the purchase date. Contributions can be amended, stopped or re-started at any time although the company may limit the number of times this can be done within a set period. |
| Matching | ﾃつ｣3,000 |
If you buy partnership shares, your employer can match them by giving you up to two free shares for every partnership share you buy. The holding period for Matching shares can be set between 3 and 5 years, however, shares must remain in the plan for 5 years to be sold free of income tax and NIC liability. |
| Dividend | ﾃつ｣1,500 |
As a shareholder you may be paid dividends on your shares. If you receive dividends on your free, partnership or matching shares, your employer may allow you to use those dividends to buy more shares to be held in the plan (Dividend Reinvestment Plan) instead of receiving the cash. These are dividend shares. The company can choose to make the DRIP optional or compulsory. You will not have to pay income tax on these reinvested dividends as long as the shares you buy with your dividends are held in the plan for at least three years. If you do not use your dividends to buy more shares in this way, they will be taxed in the same way as other dividends. The plan works by keeping the shares in a trust for you until you either leave your job or decide to take the shares from the plan. The shares must be kept in the plan trust for a specified number of years to give you the full tax benefits. |
Advantages of SIP's
If you receive free shares in the company you work for, you usually have to pay income tax and NICs on them because they are part of what you earn from your job. However, if you take part in a Share Incentive Plan, you will not have to pay income tax or NICs on the value of free or matching shares awarded to you. The longer you keep the shares in the plan, the less tax and NICs you will pay when you finally take them out.
Your plan shares are held in a trust for a holding period of at least three years. Your employer can increase this holding period to up to five years. You can take your partnership shares out of the plan at any time, but you will normally have to pay some tax and NICs on them if you take them out less than five years from the date that you bought them.
To get full income tax and NICs advantages, you will have to keep all the shares in the plan for at least five years (or three years for dividend shares).
If you keep your shares in the plan until you sell them, you will not have to pay Capital Gains Tax (CGT) on the gain you make, however much the shares grow in value.
Disadvantages of SIP's
The main downside of a SIP is that you need to hold the shares for five years before you can get all the tax benefits, and that is quite a long time, but whatever age you are it is never too early to start thinking about your future.
Another risk of a SIP is that the you are immediately exposed to the very real risk that your company's share price could plummet. Tax relief can offset this risk but to secure the full benefits of this the employee must not only hold the shares for a lengthy period but also remain an employee.
Buying partnership shares under the plan may affect your entitlement to contribution-based, earnings-related and means-tested state benefits, tax credits and work-related payments.
You will not have paid NICs on the pay that you used to buy the partnership shares. As a result, you may not have paid enough NICs to qualify for certain benefits.
Shares can go down in value as well as up. So, if you are thinking of buying partnership shares under the plan, you might want to consider whether you could afford to make a loss if the shares do not perform as well as you hope.
What is a Forfeiture Period?
A Forfeiture Period is the period of time set by the Company (up to a maximum of 3 years), during which Free or Matching Shares may be forfeited if you leave employment. Shares will not be forfeited if you leave employment for any of the reasons below:
- Injury or disability
- Redundancy or transfer
- Change of assoc company status or control
- Retirement on or after retirement age
- Death
Available, Conditional and Locked-in shares?
Locked-in shares
Shares which have not been held for the relevant 'Holding Period' and therefore cannot be sold or transferred.
Conditional shares
Shares which have been held for the relevant 'Holding Period' but would still be subject to income tax and NIC if sold or transferred.
Available shares
Shares which are no longer subject to income tax and NIC if sold or transferred.
The table below shows the different types of plan shares and at which stages of the plan they are 'Locked-in', 'Conditional' or 'Available':
| Plan Share Type | 0-3 years | 3-5 years | 5 years |
| Free | Locked in | Locked in/Conditional** | Available |
| Partnership | Conditional* | Conditional* | Available |
| Matching | Locked in* | Locked in/Conditional** | Available |
| Dividend | Locked in | Available | Available |
* The sale of Partnership Shares may result in the forfeiture of locked-in Matching Shares which have not been held for the relevant holding period.
** If your employing company has specified a Holding Period of more than 3 years these shares will remain Locked in.
Selling SIP Shares
SIP shares must be sold on a first in first out basis (FIFO) i.e. the shares held in the plan the longest must be sold first.
For example:
Mr Smith receives an annual Free share award each January of 100 shares and contributes to the Partnership Plan to purchase shares on a monthly basis.
Mr Smith's SIP holding before sale:
| Shares Awarded | |||||
| Year of Award | 2002 | 2003 | 2004 | 2005 | 2006 |
| Free | 100 | 100 | 100 | 100 | 100 |
| Partnership | 50 | 50 | 50 | 50 | 50 |
| Total | 550 | ||||
Using the above example, if Mr Smith chose to sell 200 of his SIP shares in March 2006, FIFO rules dictate that he cannot specify which plan element he wishes to sell e.g Free, Partnership.
Mr Smith can only sell a number of plan shares. Therefore using the FIFO rule the 100 Free shares awarded in 2002 must be sold, together with the 50 Partnership shares awarded in 2002 and 50 of the 100 Free shares awarded in 2003 (The 2003 Free shares are sold rather than the 2003 Partnership Shares because they were awarded first).
Mr Smith's SIP holding after sale:
| Shares Awarded | |||||
| Year of Award | 2002 | 2003 | 2004 | 2005 | 2006 |
| Free | 0 | 50 | 100 | 100 | 100 |
| Partnership | 0 | 50 | 50 | 50 | 50 |
| Total | 550 | ||||
Tax on SIP's
| Share Type | On award | Shares held 0-3 | Shares held 3 - 5 years | After 5 years |
| Free | No income tax or NIC | Possible forfeiture |
Income tax and NIC are charged on the lower of:
|
No employer NIC charges |
| Partnership | No income tax or NIC | Income tax and NIC are charged on the market value ar the time the shares are taken out of the plan | Income tax and NIC are charged at the lower of:
|
No employer NIC charges |
| Matching | No income tax or NIC | Possible forfeiture | Income tax and NIC are charged on the lower of:
|
Shares grow in value free of CGT and other tax liability |
| Dividend | No income tax or NIC are payable on dividends to purchase dividend shares | Cannot be sold | No penalty |
What happens if the company is taken over?
The old company's shares in the plan are usually exchanged for the new company's shares. Income tax reliefs continue to apply to the shares you have already been awarded, but tax charges will apply to any that you take out early following the normal rules. The trust set up to administer the plan for the old company shares stays in place at least until all of those plan shares have come out of that plan.
If the new company wishes to make awards of shares after the take over it will need to set up a new plan (if it does not already have an approved plan) - it cannot use the plan you have been participating in to award shares in the new company.
Popularity: 6% [?]
