What is a Share Incentive Plan (SIP)?

A SIP is an all-employee share scheme where employees acquire shares through a trust. The company can give free shares (up to £3,600/yr), employees can buy partnership shares from pre-tax salary (up to £1,800/yr), and the company can provide matching shares (up to 2:1). Shares held for 5+ years are free of income tax, NIC, and CGT. A Share Incentive Plan (SIP) is a tax-advantaged all-employee share scheme that allows employees to acquire shares in their company through a trust. How it works: (1) Trust — the company sets up a SIP trust, which holds shares on behalf of employees. (2) Four share categories — (a) Free shares: the company can give employees up to £3,600 worth of free shares per year. (b) Partnership shares: employees can buy shares from their pre-tax salary (up to £1,800 or 10% of salary per year). (c) Matching shares: the company can give up to 2 matching shares for every partnership share purchased. (d) Dividend shares: dividends on SIP shares can be used to buy additional shares (up to £1,500 per year). (3) Tax advantages — no income tax or NIC on shares at acquisition, no income tax or NIC on shares held for 5+ years, no CGT while shares remain in the SIP, and no IHT on SIP shares (business property relief). (4) Withdrawal — shares can be withdrawn at any time, but full tax advantages require 5 years of holding. (5) Eligibility — SIPs must be offered to all employees who meet the eligibility requirements (typically all employees with 12 months of service). SIPs are the most generous tax-advantaged share scheme in the UK, designed to promote broad-based employee share ownership. Relevant legislation: Schedule 2 ITEPA 2003 (SIP rules); Share Incentive Plan Regulations 2014 (as amended). Example: A company offers a SIP to all employees. An employee earning £50,000 buys £1,800 of partnership shares from pre-tax salary (saving income tax at 40% = £720). The company gives £3,600 of free shares and matches the partnership shares 2:1 (3,600 matching shares). The employee has £9,000 of shares in the SIP. After 5 years, the shares are worth £15,000. The employee can withdraw the shares with no income tax, NIC, or CGT (if they remain in the SIP until disposal). Common mistake: Confusing SIPs with SAYE (Sharesave). SIPs involve actual share acquisition through a trust, while SAYE is a savings-linked option scheme. They have different rules and tax treatments.

What are the tax advantages of a SIP?

SIPs offer the most generous tax advantages: no income tax or NIC on share acquisition, no income tax or NIC on shares held for 5+ years, no CGT while shares remain in the SIP, and no IHT on SIP shares. Dividend shares are also tax-free if held for 3+ years. SIPs offer the most generous tax advantages of any UK share scheme: (1) Acquisition — no income tax or NIC on free shares, matching shares, or partnership shares at acquisition. Partnership shares are purchased from pre-tax salary, providing income tax savings. (2) 5-year holding — no income tax or NIC on free shares, matching shares, and dividend shares held in the SIP for 5+ years. (3) CGT — no CGT on shares while they remain in the SIP. CGT is only due when shares are withdrawn from the SIP and subsequently sold (based on the market value at withdrawal). (4) Dividend shares — no income tax on dividend shares held for 3+ years. (5) IHT — SIP shares are treated as business property and qualify for Business Property Relief (BPR) at 100%, meaning no IHT on shares held in the SIP at death. (6) Dividends — dividends paid on SIP shares are tax-free if reinvested as dividend shares (up to £1,500 per year). If dividends are paid out as cash, they are subject to dividend tax. The key condition for the full tax advantages is that shares must remain in the SIP for 5+ years. Early withdrawal results in the loss of some tax advantages. Relevant legislation: Schedule 2 ITEPA 2003, Part 4 (SIP tax advantages); TCGA 1992, Section 257 (CGT on SIP shares); IHTA 1984, Section 103 (BPR for SIP shares). Example: An employee has £10,000 of shares in a SIP for 6 years. The shares are now worth £20,000. They withdraw the shares from the SIP: no income tax or NIC (held for 5+ years). They sell the shares for £20,000: CGT is due on the gain from the market value at withdrawal (£20,000) to the sale price (£20,000) = £0. If they had withdrawn after 2 years, income tax and NIC would be due on the free and matching shares at the withdrawal value. Common mistake: Withdrawing shares from the SIP before 5 years. Early withdrawal results in income tax and NIC on free and matching shares, significantly reducing the tax advantage. Where possible, hold shares in the SIP for at least 5 years.

How are SIP shares taxed on withdrawal?

Shares withdrawn within 3 years: income tax and NIC on free and matching shares at withdrawal value. 3-5 years: tax on the lower of acquisition or withdrawal value. 5+ years: no income tax or NIC. Partnership shares are always tax-free. CGT is due on disposal based on the value at withdrawal. The tax treatment of SIP shares on withdrawal depends on how long they have been held in the SIP: (1) Within 3 years — income tax and NIC are due on free shares and matching shares at their market value at the time of withdrawal. Partnership shares are tax-free (the employee bought them). Dividend shares are subject to income tax. (2) 3-5 years — income tax and NIC are due on free shares and matching shares, but only on the lower of their acquisition value or their market value at withdrawal. Partnership shares and dividend shares (held 3+ years) are tax-free. (3) 5+ years — no income tax or NIC on any shares (free, matching, partnership, or dividend). All shares are tax-free on withdrawal. (4) CGT on disposal — when shares are withdrawn from the SIP and subsequently sold, CGT is due on the gain from the market value at the time of withdrawal to the sale price. The original acquisition cost is not relevant (the base cost is the market value at withdrawal). If shares remain in the SIP until disposal (sold within the SIP), no CGT is due. The withdrawal rules mean that employees are incentivised to hold shares in the SIP for at least 5 years to maximise the tax advantages. Relevant legislation: Schedule 2 ITEPA 2003, Part 5 (withdrawal rules); Schedule 2 ITEPA 2003, Paragraphs 51-58 (tax on withdrawal). Example: An employee has £5,000 of free shares in a SIP (acquisition value £3,000). They withdraw after 2 years when the shares are worth £5,000. Income tax and NIC are due on £5,000 (withdrawal value, within 3 years). If they withdraw after 4 years, tax is due on £3,000 (lower of acquisition £3,000 or withdrawal £5,000). If they withdraw after 6 years, no income tax or NIC is due. Common mistake: Not considering the timing of withdrawal. Withdrawing shares just before the 5-year mark can result in significant income tax and NIC charges. Where possible, wait until 5 years have passed.

Who is eligible for a SIP?

SIPs must be offered to all employees who meet the eligibility requirements. The company can require 12 months of service, but cannot exclude employees based on role, seniority, or hours worked (other than a 20-hour minimum). SIPs are all-employee schemes, which means they must be offered to all eligible employees. Eligibility requirements: (1) Age — employees must be 18 or over. (2) Service — the company can require employees to have 12 months of service (or less, at the company's discretion). (3) Working hours — the company can exclude employees who work fewer than 20 hours per week. (4) All employees — the SIP must be offered to all employees who meet the above requirements. The company cannot selectively offer the SIP to certain employees (e.g., only senior employees or only full-time employees above 20 hours/week). (5) Free shares — the company can use performance conditions for the award of free shares, but the conditions must be based on objective criteria (e.g., company performance, individual performance). (6) Partnership shares — all eligible employees must be allowed to buy partnership shares (the company cannot restrict this). (7) Matching shares — the company can set the matching ratio (up to 2:1), but it must be the same for all employees. The all-employee requirement ensures that SIPs promote broad-based share ownership across the entire workforce, not just senior employees. Relevant legislation: Schedule 2 ITEPA 2003, Paragraph 3 (eligibility requirements); Schedule 2 ITEPA 2003, Paragraph 5 (all-employee requirement). Example: A company with 200 employees sets up a SIP. All employees with 12 months of service and working 20+ hours per week (180 employees) must be invited to participate. The company cannot offer the SIP only to its 20 senior managers. All 180 eligible employees can buy partnership shares and receive free and matching shares. Common mistake: Offering the SIP only to senior employees. SIPs must be offered to all eligible employees. Offering selectively can result in the loss of tax advantages for all participants.

Share Schemes › All-Employee

Share Incentive Plan (SIP)

SIPs are the most tax-advantaged all-employee share scheme. Understand the four share categories, tax exemptions, and how SIPs build employee share ownership across the entire workforce.

Book a Consultation +44 (0) 800 211 8657

The Share Incentive Plan (SIP) is the most tax-advantaged all-employee share scheme in the UK. Unlike EMI and CSOP, which are selective, SIPs must be offered to all eligible employees. SIPs allow employees to acquire shares in their company with significant tax advantages, including no income tax or NIC on shares held in the SIP for 5+ years, and no CGT on disposal if the shares remain in the SIP. Understanding how SIPs work and their tax advantages is essential for companies promoting broad-based employee share ownership.

How SIPs Work

A SIP operates through a trust that holds shares on behalf of employees. There are four ways employees can acquire shares in a SIP: (1) Free shares — the company can give employees up to £3,600 worth of shares per year, tax-free. (2) Partnership shares — employees can buy shares from their pre-tax salary (up to £1,800 or 10% of salary per year). (3) Dividend shares — dividends paid on SIP shares can be used to buy additional shares (up to £1,500 per year). (4) Matching shares — the company can give employees up to 2 matching shares for every partnership share purchased.

Tax Advantages

SIPs offer the most generous tax advantages of any UK share scheme: (1) No income tax or NIC on free, matching, or partnership shares at acquisition. (2) No income tax or NIC on dividend shares. (3) No income tax or NIC on shares held in the SIP for 5+ years. (4) No CGT on shares while they remain in the SIP (CGT is only due when shares are withdrawn from the SIP). (5) No IHT on shares held in the SIP (they are treated as business property). The key condition is that shares must remain in the SIP for 5 years to get full tax advantages.

Withdrawal Rules

If shares are withdrawn from the SIP within 5 years, some tax advantages are lost: (1) Within 3 years — income tax and NIC on free and matching shares (at withdrawal value). (2) 3-5 years — income tax and NIC on the lower of the acquisition value or the withdrawal value. (3) 5+ years — no income tax or NIC. Partnership shares are always tax-free (the employee bought them). Dividend shares are tax-free if held for 3+ years.

SIP vs Other Schemes

SIPs are different from EMI and CSOP in several ways: (1) All-employee — SIPs must be offered to all eligible employees, while EMI and CSOP can be selective. (2) No option — SIPs involve actual share acquisition (not options), while EMI and CSOP are option schemes. (3) Holding requirement — SIP shares must remain in the SIP trust for 5+ years for full tax advantages, while EMI/CSOP options are exercised at the employee's discretion. (4) No individual limit — SIPs have a per-employee annual limit (£3,600 free shares, £1,800 partnership shares), while EMI has a £3 million lifetime limit and CSOP has a £60,000 limit. SIPs are best for broad-based employee ownership, while EMI/CSOP are for targeted incentives.

Key Points

What You Need to Know

SIPs are the most tax-advantaged all-employee share scheme in the UK
Four share categories: free shares (£3,600/yr), partnership shares (£1,800/yr), dividend shares (£1,500/yr), matching shares (2:1)
No income tax, NIC, or CGT on shares held in the SIP for 5+ years
SIPs must be offered to all eligible employees (not selective)
Shares must remain in the SIP trust for 5 years for full tax advantages

Expert Answers

Share Schemes Frequently Asked Questions

Detailed answers with legislation references, practical examples and common pitfalls.

Explore More

All Share Schemes Topics

EMI Eligibility & Qualifying Companies EMI Tax Advantages Company Share Option Plan (CSOP)Growth Shares Business Asset Disposal Relief (BADR)Share Schemes on Exit Save As You Earn (SAYE / Sharesave)Unapproved Options & RSUs Share Incentive Plan (SIP)Employee Ownership Trusts (EOTs)Share Valuation for EMI & CSOP HMRC EMI Notification & Reporting Phantom Shares & Cash-Settled Awards Share Schemes on IPO

Need Specialist Share Schemes Advice?

Our tax advisers can help you navigate share schemes with clear, practical advice tailored to your circumstances.

Book a Consultation Call +44 (0) 800 211 8657