New guide to share incentive plans

What you will find in this report by IDS

This 29-page study takes a detailed look at the extent to which 31 companies offer the three main types of shares available through a SIP -- free, partnership and matching shares.

It looks at current trends in scheme design and analyses variations in savings arrangements, matching ratios for employee-purchased shares, and company policies on forfeiture and the reinvestment of employees' share dividends.

The report:

• explains the different categories of shares available through SIPs
• sets out the key Inland Revenue requirements including annual savings limits
• highlights the tax advantages for employers and employees
• summarises the rules on eligibility, forfeiture of shares and the use of performance criteria in allocating awards
• includes key features of the SIPs operated by 31 named companies.

What is the share incentive plan?

SIP is a tax-advantaged plan to encourage employees to hold shares in the company or group for which they work. It was introduced in the Finance Act 2000.

The legislation provides for three main types of plan shares to be used:

• Free shares: Employers can grant employees up to £3,000 worth of free shares each tax year, which can be distributed according to pay, length of service, hours worked, or even linked to performance.
• Partnership shares: Employees can buy partnership shares out of their pre-tax and pre-national insurance earnings, up to a maximum of £1,500 a year or 10% of salary, if lower.
• Matching shares: Employers can give matching shares at a ratio of up to two free matching shares for each partnership share bought by the employee.

No tax or national insurance is payable on shares if they are kept for at least five years.

Companies can also allow an employee to use up to £1,500 of dividends from his or her plan shares each year to buy further shares -- called Dividend shares -- in the company through the plan.

It is not necessary for all three types of share to options to be used by a company operating a SIP. Various options for distributing shares under a SIP plan can be used -- for example, free shares only, or partnership with or without matching shares, or another combination to suit the business needs of the company.

Optional features

As well as being able to choose between the different kinds of plan shares to build a plan that suits its business needs, there is scope for employers to include other optional features:

• Eligibility criteria: Companies can prescribe a period of up to 18 months' employment before employees are eligible to participate in a SIP.
• Performance-related awards: Companies can link the award of free shares to performance measures.
• Forfeiture: Companies can make employees give up some or all of their free or matching shares if they leave, for certain reasons, within three years of the award date.
• Holding periods: While free and matching shares must stay in the plan for three years, companies can require employees to hold these in the plan for up to five years. Dividend shares must normally be held for three years.

Further details

For more information about share schemes visit the Inland Revenue web site at www.inlandrevenue.gov.uk/shareschemes/index.htm