ERSM303100 - Approved Share Incentive Plans: Overview
This is an all-employee plan. All qualifying employees and directors must be eligible to participate on the same terms either by receiving the same value of shares or an amount varied by level of remuneration, length of service or hours worked (special rules apply if share awards are performance-related).
- The company can specify a qualifying period of employment, which may be up to 18 months, in order for employees to be eligible to participate.
- Employees can enter into a Partnership Share Agreement to buy Partnership Shares out of pre-income tax and pre-NIC salary.
- Employees can also receive awards of shares including one only or a combination of;
- Free Shares (which may be performance-related awards). The maximum value of Free Shares per tax year is £3,000.
- Partnership Shares bought by employees. The maximum pre-tax and pre-NIC salary that can be used to buy Partnership Shares is £1500 per annum.
- Matching Shares. Companies can match employee's partnership share purchases by giving them additional shares. The maximum award of Matching Shares is 2 Matching Shares for each Partnership Share bought.
- Free and Matching shares must normally be held in trust by the trustees in the name of the employee for a period of 3-5 years (set by the company). At the end of that time, employees can sell the shares if they wish.
The Plan operates with a trust funded by the company.
Employers can provide for dividends on shares in the plan to be reinvested, tax-free, in more shares in the plan. These "Dividend Shares" must normally be held in the trust for a period of 3 years. At the end of that time, employees can sell the shares if they wish. The maximum value of dividends that can be reinvested each year is £1,500.
Employers must operate PAYE on taxable employment income derived from a SIP if the shares are readily convertible assets or the employee receives cash.
As with all HMRC approved plans the company can only operate a plan after HMRC has approved it.
Tax relief
- Income tax and NICs are not chargeable when shares are awarded to or acquired for participating employees.
- Employees who keep their shares in a plan for 5 years pay no income tax or NICs on those shares.
- Employees who take their shares out of the plan after 3 years will normally pay income tax and NICs on no more than the initial market value of those shares - any increase in the value of their shares while in the plan will be free of income tax and NICs.
- Employees who take their shares out of the plan within 5 years because they are leaving the company for a “good leaver” reason will pay no income tax or NICs on their shares. [link to ERSM 303200?]
- Employees who sell their shares will be liable to capital gains tax (CGT) only on any increase in the value of their shares after they have come out of the plan.
- Existing shareholders who want to sell their shares to a new plan trust to be used for the benefit of employees, may be able to benefit from a CGT rollover relief.
- Employers will get corporation tax relief for the costs of setting up and running the plan, including the cost of Free and Matching shares, and the cost of providing Partnership shares to the extent that this exceeds contributions received from employees.
- Employers will not pay employer's NIC where the shares are held in the plan for 5 years.
Annual reporting requirement
On the first working day after the end of the tax year (usually 6 April) ESSU issues a notice to file to all companies that have approved Share Incentive Plans. The notice sets out the legal obligations for a return to be filed and provides details of where to obtain a return for completion. ESSU does not automatically issue blank return forms. A pdf version of Form 39 is available for download from the shareschemes web page or from the useful forms section of the Employer CD-Rom issued annually to employers. From 6t h April 2006 it has also been possible to file the annual return online.
- Section 1 of the return requires summary details of all awards to eligible employees on any day during the tax year, there is no requirement to provide individual details of awards.
- Section 2 of the return requires details of all shares ceasing to be subject to the plan within 5 years of the date of award.
- Sections 3 to 6 of the return require details of other aspects of scheme activity during the tax year.
