SAIM5080 - Dividends and other company distributions: dividends from share incentive plans

Shares in approved share incentive plans (‘SIPs’)

Shares incentive plans are explained in the Employment Related Securities Manual (see Chapter 6 of Part 7 of, and Schedule 2 to ITEPA03, and ERSM330000). SIPs are designed to encourage employee share ownership. Shares acquired or awarded under the plan are held on behalf of the scheme participant by the scheme trustees, who receive any dividends paid under the scheme. Cash dividends may be reinvested in further shares and are called ‘dividend shares’. These are exempt from income tax under ITTOIA05/S770.

ITTOIA05/S392 to S396 form part of the SIP code. The sections set out the tax charge that arises if:

  • the trustees do not reinvest the dividends but pay over the cash dividend to the participant, or;
  • the dividend shares cease to be subject to the approved SIP.

Section 392 sets out the tax charge, which applies only if the participant has benefited from the tax advantages of an approved SIP. Under section 393 any amount not reinvested is taxed (and any entitlement to tax credit is determined) for the tax year in which the dividend is paid over to the scheme participant rather than the year in which it was originally paid. The scheme may only hold on to a cash dividend and carry it forward for three years from the date of payment.

Under section 394 the participant is treated as receiving a distribution in the year in which the shares cease to be subject to the SIP within three years of acquisition. Unlike section 393 this is a further distribution not a postponement of the original charge. Section 395 reduces the charge if tax has been paid on capital receipts in respect of plan shares.

Shares of non-UK resident companies

There are equivalent rules for SIPs involving shares in non-UK resident companies in ITTOIA05/S405 to S408.