View the related Tax Guidance about Share incentive plan
Share incentive plans ― an overview
Share incentive plans ― an overviewUpdate: At Spring Budget 2023, the government announced that it would launch a call for evidence on the save as you earn (SAYE) and share incentive plan (SIP) employee share schemes. The government will use the call for evidence to consider opportunities to improve and simplify the scheme.Link to the consultation is found here, and closes on 25 August 2023.IntroductionShare incentive plans (SIPs) were originally known as ‘All Employee Share Ownership Plans’ and were first introduced over 20 years ago. They are one of four tax-advantaged employee share schemes currently available in the UK. Under a SIP, employees can buy shares in their employing company from their gross salary whilst the employer can also provide them with matching shares at no extra cost to the employee. The shares are held in a separate SIP trust whilst they reside in the SIP plan. The legislation governing SIPs is found in ITEPA 2003 Schedule 2, and HMRC often refer to this type of plan as a Schedule 2 SIP.When all relevant conditions are satisfied, no liabilities to income tax or national insurance contributions (NIC) arise on shares being awarded to employees or withdrawn from the SIP. Qualifying Schedule 2 SIPs must be open to all eligible employees. See Simon’s Taxes E4.528. Employers must self-certify that all the SIP legislation is met by the plan following the end of the tax year in which awards are first made to employees. This self-certification must be repeated annually. Simon’s
Share incentive plans
Share incentive plansWhat is a share incentive plan (SIP)?The share incentive plan (SIP) is a tax-advantaged employee incentive plan, which provides employees with the opportunity to obtain a continuing stake in the employing company through the acquisition of shares (not share options). Provided qualifying conditions are met, the SIP attracts income tax and national insurance contribution (NIC) advantages for participants.The plan must be open to all UK resident employees, although a qualifying period of up to 18 months can be imposed. The terms must be the same for every employee who wishes to participate, and no preferential treatment can be given for directors or senior employees.The SIP must be operated via a UK resident trust. The SIP trust holds shares on behalf of employees.A number of changes were made to the SIP rules by FA 2013 and FA 2014 to simplify the administration of the scheme and harmonise some of the rules with that of other tax-advantaged schemes. One of these changes means that from 6 April 2014 a qualifying SIP is known as a ‘Schedule 2 SIP’.The Government launched a call for evidence in June 2023 to determine whether the plan still meets its original policy objectives and whether the rules can be improved or simplified. This was published on the same day as a report commissioned by HMRC into the use of tax-advantaged share schemes.Key considerations for a Schedule 2 SIPEligible employeesAll UK resident eligible employees must be able to participate in the plan, and must be invited to do so. Generally speaking,
Introduction to share schemes
Introduction to share schemesIntroductionHistorically, the development and use of share schemes can be linked to companies seeking to use the rules to reward employees and directors in a way that did not, typically, attract income tax and national insurance contributions. However, as with all such schemes, the legislation has developed in order to ensure that payments by way of salary or bonus could not be simply recategorised in this way and paid out with lower (or even no) tax due.The share schemes legislation sets out a wide range of scenarios where income tax and, potentially, national insurance are due on transactions and events that involve shares and securities, particularly those where the recipients have an employment relationship with the company.However, share schemes are still a popular method of incentivising employees and there are a number of specific plans set out by tax legislation for companies to use. For commentary on why share schemes are popular methods of retaining staff, see the Why use a share scheme? guidance note.From 6 April 2014, share schemes, including share option schemes, no longer need to be approved by HMRC in advance of award of the shares or grant of the option. Instead, the company must provide notification within a certain time frame and self-certify that a scheme meets the criteria to benefit from the beneficial tax rules. Share schemes that were previously known as ‘approved’ schemes are now referred to as ‘tax-advantaged’ schemes.Given that tax-advantaged schemes confer tax benefits on the shares or
Employment-related securities ― overview
Employment-related securities ― overviewIntroductionShares, or other forms of securities, awarded to employees may be taxed as:•earnings, or•under the special employment-related securities (ERS) rules, which seek to modify the tax position in cases where the tax result that would flow from the particular circumstance does not reflect the full economic value received, or where the Government has determined that it wants a different tax burden or timing to apply.What are securities?The definition of ‘security’ includes stocks and shares of any description but is very wide and also includes items which one would not normally describe as a security, such as insurance contracts and contracts for differences. The definition excludes certain items such as cheques and bank statements (which hardly any-one would think of as such) but, perhaps surprisingly, excludes security options (unless used as part of a tax avoidance arrangement). However securities options are subject to their own specific rules. ITEPA 2003 ss471 – 484 (Chapter 5)The significance of ‘employment related securities’It has long been established by case law that where an employee acquires shares in their employing company and pays less than market value for those shares, the discount is taxable as earnings (as defined in ITEPA 2003, s 62). Charge on acquisitionThe charge to tax on employment income in ITEPA 2003, s 6 relates to:•general earnings•specific employment incomeIn outline, ‘general earnings’ are earnings within s 62 and amounts ‘treated as’ earnings, which includes benefits in kind within the benefits code, while ‘specific employment income’
Cash dividends
Cash dividendsIntroductionA dividend is a distribution of profit by a company to its shareholders.A dividend is not only a payment in cash. It can be the issue of new shares in exchange for forfeiting the right to a cash payment (a stock dividend). For more detail, see the Non-cash dividends guidance note.This guidance note deals with cash dividends from UK resident companies. For more on dividends from non-UK resident companies, see the Foreign dividends guidance note.The taxation of dividends is discussed in the Taxation of dividend income guidance note.Cash dividends from UK resident companiesCash dividends paid by UK companies on or after 6 April 2016 have no dividend tax credit attached, meaning the amount received is the amount which is taxable. The company should issue the shareholder with a dividend voucher showing the number of shares held by the shareholder, the dividend paid and the date of payment.The amount reported in box 4 of the main tax return is the total dividends received from UK resident companies in the tax year (ie the arising basis of assessment). Dividends are reported on box 5.3 of the short tax return, see the Short tax return guidance note.The taxation of dividends is discussed in the Taxation of dividend income guidance note.Note that where certain conditions are met, dividends from non-UK incorporated close companies may be treated for UK tax purposes as if they were UK dividends irrespective of the residence status of the company. See the Foreign dividends guidance note. UK cash
Penalties for late filing
Penalties for late filingIntroductionA single regime that imposes penalties for failure to make or deliver returns or documents on or before the statutory filing date for the particular return in question was legislated in FA 2009, Sch 55.Despite this intention, the FA 2009, Sch 55 penalty regime does not apply to:•corporation tax returns•inheritance tax returns•share scheme returns•digital services tax returns•VAT returnsThe penalties under the FA 2009, Sch 55 regime and the penalties outside of that regime are summarised below.When is a return considered to be delivered to HMRC?Online returns are automatically recorded as being received as soon as the HMRC computer system receives the return. Simple checks are carried out automatically and HMRC reviews the return to ensure it is complete.Returns sent by post or delivered in person are considered to be delivered when physically handed over to HMRC office staff, or placed in an HMRC office letter box during work hours. HMRC will update its computer system to show the return has been received, either on the day of receipt or as soon as possible afterwards. Again, simple checks are carried out and the return reviewed to ensure it is complete.Taxpayers or agents who post or hand deliver paper returns to HMRC should retain evidence of the date on which this was done; for example, proof of postage or a contemporaneous file note.FA 2009, Sch 55 late filing penalty regimeFor a list of taxes to which the FA 2009, Sch 55 late filing penalty regime applies, see Simon’s Taxes A4.550.The FA 2009, Sch 55 penalty regime
Non tax-advantaged share awards
Non tax-advantaged share awardsSummaryHMRC tax-advantaged share award plans are limited in size, tightly defined and, broadly, require awards to be offered to all staff. See the Share incentive plans guidance note. Accordingly, any awards outside this type of plan are considered non tax-advantaged (previously known as ‘unapproved’).Typically, share awards are seen in the reward packages of senior executives and key employees, often as part of a wider long-term incentive plan (LTIP).Although there may be some similarities between awards of shares and grant of options, the key difference is that with options, the actual ownership of the share is delayed until the option is exercised. In addition to practical considerations (such as the clock for entrepreneurs’ relief usually starting from the date of share acquisition, see the Conditions for business asset disposal relief guidance note), it may be considered to be a better incentive for employees to have ownership from an earlier date.Acquisition of the sharesThe first consideration with any share award is to establish the market value of the shares being acquired, see the
PAYE on readily convertible assets
PAYE on readily convertible assetsIntroductionWhere a share incentive plan is operated, the company may have obligations to account for income tax and NIC via the PAYE system if there are gains made in connection to employee shares. This will be the case where the shares meet the definition of a readily convertible asset (RCA). It is therefore crucial to understand the definition of an RCA to avoid errors and underpayments which can attract penalties.See Simon’s Taxes E4.1124Definition: what is a readily convertible asset?The statutory definition of an RCA is given in ITEPA 2003, s 702. There are 9 types of asset within that definition. An asset:•capable of being sold or otherwise realised on a recognised investment exchange•capable of being sold or otherwise realised on the London Bullion Market•capable of being sold or otherwise realised on the New York Stock Exchange•capable of being sold or otherwise realised on a market for the time being specified in PAYE regulations•consisting in the rights of an assignee, or any other rights, in respect of a money debt that is or may become due to the employer or any other person•consisting in property that is subject to a warehousing regime, or any right in respect of property so subject•consisting in anything that is likely (without anything being done by the employee) to give rise to, or to become, a right enabling a person to obtain an amount or total amount of money that is likely to be
Employer consequences of share schemes
Employer consequences of share schemesThere are a number of different consequences that can arise for employers as a result of introducing and operating employee share incentive arrangements, some beneficial and some costly.There may be an opportunity to obtain corporation tax relief on payments in the form of shares. This relief might also extend to the cost of implementing and running share schemes.Companies are also obliged to account for PAYE in respect of employee share awards in certain circumstances and on certain ‘chargeable events’ in relation to employment-related shares.Finally, companies that employ individuals who benefit from share schemes must budget for any employer’s NIC liability that might arise. This represents a real cost though in some circumstances it may be passed on to the employee.This guidance note does not consider the implications of the disguised remuneration legislation since this is looked at in detail elsewhere (see the Disguised remuneration ― overview guidance note) and is only peripheral to employee share arrangements.Corporation tax reliefIn order for shares to qualify for corporation tax relief, they must meet a number of different requirements. If certain statutory reliefs in respect of the costs of employee share schemes do not apply, the company may make a case to its HMRC office that it is entitled to make a deduction from corporation tax under general principles, eg where the expenditure was necessary to benefit the business.The company’s businessIn order to qualify for corporation tax relief in respect of employee shares awards the company must, as a
EMI schemes ― qualifying conditions for employees
EMI schemes ― qualifying conditions for employeesThe enterprise management incentive (EMI) scheme is a tax-advantaged share option employee incentive scheme aimed at small entrepreneurial companies that meet certain conditions. It is designed to assist such companies in recruiting and retaining high quality employees.As the EMI scheme is attractive, there are conditions that must be met by the company as well as the employees. For the conditions that must be met by the company, see the EMI schemes ― qualifying conditions for companies guidance note.This guidance note considers the conditions that must be met by the employees.In order to be an eligible employee, there are three different types of condition that have to be met. These relate to:•employment status•working time•material interestThese are considered below.Employment statusThis requirement defines an eligible employee as somebody who is working either for the company running the plan or any one of its qualifying subsidiaries. This means that EMI cannot be used to reward self-employed consultants, unless they become employees.However, consultants may offer services to a number of companies in start-up mode without wishing to work exclusively for a single one.Working timeUnder the EMI legislation, which differs from that for some of the other tax-advantaged schemes, it is necessary for an employee’s ‘committed time’ to meet one of the two criteria. Either individuals must work for at least 25 hours a week or, if less, 75% of their total ‘working time’ (as defined in ITEPA 2003, Sch 5, para 27). It is relatively
Tax legislation doesn't stand still, and neither should you. At Tolley we're constantly building tools to give you an edge, save you time and help you to grow your business.
Register for a free Tolley+™ Research trial to discover more tax research sources designed for you