Tax on Share Incentive Plans (SIP)

Tax on Share Incentive Plans

posted on June 12, 2020

by: Ian Marlow / 0 comments / Tax Planning

Many clients come to us wanting help in understanding the situation regarding tax on share incentive plans. If your employer offers you company shares, you can receive tax benefits, such as not paying Income Tax or National Insurance on the value of the shares. The tax advantages only apply if the shares are offered through the following schemes:

Share Incentive Plans

If you get shares through a Share Incentive Plan (SIP) and keep them in the plan for 5 years you won’t pay Income Tax or National Insurance on their value. You won’t pay Capital Gains Tax on shares you sell if you keep them in the plan until you sell them. If you take them out of the plan, keep them and then sell them later on, you might have to pay Capital Gains Tax if their value has increased.

Save As You Earn (SAYE)

This is a savings-related share scheme where you can buy shares with your savings for a fixed price. You can save up to £500 a month under the scheme. At the end of your savings contract (3 or 5 years) you can use the savings to buy shares. The tax advantages are:

the interest and any bonus at the end of the scheme is tax-free
you don’t pay Income Tax or National Insurance on the difference between what you pay for the shares and what they’re worth

You might have to pay Capital Gains Tax if you sell the shares but you won’t have to pay if you put them into:

an Individual Savings Account (ISA) within 90 days of buying them
a pension as soon as you buy them

Company Share Option Plans

This gives you the option to buy up to £30,000 worth of shares at a fixed price. You won’t pay Income Tax or National Insurance contributions on the difference between what you pay for the shares and what they’re actually worth. You may have to pay Capital Gains Tax if you sell the shares.

Enterprise Management Incentives (EMIs)

If you work for a company with assets of £30 million or less, it may be able to offer Enterprise Management Incentives (EMIs). Your company can grant you share options up to the value of £250,000 in a 3-year period. You won’t have to pay Income Tax or National Insurance if you buy the shares for at least the market value they had when you were granted the option. If you were given a discount on the market value, you’ll have to pay Income Tax or National Insurance on the difference between what you pay and what the shares were worth. Again, you may have to pay Capital Gains Tax if you sell the shares.

You may be offered shares outside of these schemes. However these won’t have the same tax advantages.

Reporting the Tax on Share Incentive Plans on Your Tax Return

When reporting the tax on share incentive plans, the basic thing to remember is that income tax will be charged where appropriate on the difference between the the value of the shares when you receive them and the cost to you. If you work for a listed company then the relevant number of shares will be sold by them to cover the tax and National Insurance due. If not, then your company may expect you to pay the tax and NI directly.

When you sell shares there is also a potential charge to capital gains tax and we suggest you take advice on the best way to realise the value of your shares.