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“SIP-LITE”

In reaction to the experience of many employees of underwater options and the harsh accounting treatment of the options, the last decade has seen wide-spread adoption, for executives in quoted companies, of equity incentives in the form of share based awards, variously referred to as LTIPs, restricted shares, PSPs, deferred shares etc.

However, did you realise that it is possible to offer similar awards to all your UK employees in a highly tax efficient form using Government approved legislation?

The Share Incentive Plan (SIP) legislation was introduced in 2001 and David Pett of our firm, was part of the advisory group that helped the Government develop the plan. It was intended to offer employers a menu of choice in the design of the SIP but ironically the apparent complexity caused by this choice has deterred some from implementing such schemes.

However, it is possible to structure SIPs in a straightforward way which also keeps the administration relatively simple – we call such schemes “SIP-LITE”.

Example

If employees receive an annual cash bonus they could choose to take up to £1,500 of the bonus by acquiring shares.

The employee effectively buys shares at a discount by being able to purchase the shares with gross earnings. This gives the employee a buffer in the event of a share price fall. The employer would save NICs on the bonus used to acquire shares and potentially most important of all, if the shares are held in the SIP arrangement for 5 years or longer, all the growth in value would be entirely tax free for the employee.

If the shares are sourced by new issue there is no cash outflow for the employer and in fact there is a cash inflow for the share subscription which is funded partly by the employee and partly by HMRC.

Examples of the potential initial savings at 2011/12 tax rates are set out in the pdf, click here.

 

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