How Do You Calculate Tax On A Share Incentive Plan?
By
HuutiMoney
The United Kingdom has a number of different tax incentives for businesses to promote growth and expansion. One of these is the Share Incentive Plan (SIP), which allows businesses to offer share options to their employees as a form of remuneration. In this article, we will explain how to calculate the tax on a Share Incentive Plan and what are the considerations and limitations of SIPs.
How Do You Calculate Tax On A Share Incentive Plan?
The tax treatment of SIPs is complex and depends on a number of factors, such as whether the shares are free shares or matching shares. Shares received under a Share Incentive Plan remain tax-free for recipients for three to five years. The reasons for this are that employees receive shares as part of their job and are held in trust by the employers for three to five years.
However, if an employee leaves the job or wishes to take the shares out of the SIP before the set time period, they will have to pay income tax on them.
Another important factor to consider here is the type of shares assigned to employees under a SIP. These include the following:
- Free Shares: These are free shares worth up to £3,000in any tax year that are usually linked to work-related performance.
- Partnership Shares: These can be bought by employees using their gross pay. You can either spend £1,500 per tax year (£125 a month), or 10% of your total salary for the tax year to buy them.
- Matching Shares: These are shares matched by employers against an employee’s purchase of partnership shares. An employer can give employees up to two free shares for every partnership share that they buy.
- Dividend Shares: These are shares bought from the dividend income of any of the other three types of shares. Employees can use up to £1,500 of plan dividends to purchase such shares in a given tax year.
Irrespective of the type of shares, you do not have to pay income tax on them:
- when you receive them
- if you take them out after 5 years
However, if an employee chooses to take out their shares before five years, their tax calculation will be based on the following elements; (a) the time duration; and (b) the type of shares one has received:
| Type of shares | Tax implications of taking them out before 3 years | Tax implications of taking them out before 3 years |
| Free Shares | Income tax is payable as per the market value of the shares when they are taken out of the plan | Income tax is payable as per the lower of the market value of the shares at the time:• they were acquired, or• taken out of the plan |
| Partnership Shares | Income tax is payable as per the market value of the shares when they are taken out of the plan | Income tax is payable based on the lower of:• income used to buy the shares, or• market value of the shares when taken out of the plan |
| Matching Shares | Income tax is payable as per the market value of the shares when they are taken out of the plan | Income tax is payable as per the lower of the market value of the shares at the time:• they were acquired, or• taken out of the plan |
| Dividend Shares | Dividends used to buy shares are taxed as a dividend during the tax term when the shares are taken out of the plan | There is no income tax or NICs to pay |
What Are The Tax Implications Of Selling Shares Received Through A Share Incentive Plan In The Uk?
When you sell shares that you received through a SIP, you will need to pay tax on any gains made on the shares. The amount of tax you pay will depend on the type of plan you received the shares through and the length of time you held the shares.
The tax implications of selling shares received through a Share Incentive Plan in the UK depend on when the shares were acquired and how long they have been owned.
If the shares were received as free or matching shares, then the income tax rate is the same as for selling any other asset. For example, in the 2022/23 tax year, any profits from the sale of shares will be taxed at the basic rate of tax, which can be between 10% and 20%.
However, if the shares were acquired as partnership shares, then the rules become more complicated. In this case, the tax rate is determined by when the participation period starts. If it begins before the start of the tax year then the income tax rate is the same as for selling any other asset.
However, if the participation period starts on or after the start of the tax year, then the tax rate is determined based on the individual’s current tax situation.
In all cases, the amount of tax due on the sale of shares received through a Share Incentive Plan depends on the individual’s other sources of income and whether they are eligible for certain tax reliefs.
What Are The Considerations And Limitations For Taxation Of Share Incentive Plan Shares In The UK?
The UK’s share incentive plans (SIPs) are popular with companies as they offer a number of tax advantages to employees. However, there are a number of considerations and limitations that companies should be aware of before implementing a SIP.
First and foremost, it is important to note that SIP shares are subject to income tax and national insurance contributions (NICs) after the end of a five-year term. This means that employees will be required to pay tax on any profits they make from selling their SIP shares. In addition, employers should be aware that they may be liable for employers’ NICs on the value of the SIP shares.
Secondly, it is worth noting that SIP shares are also subject to capital gains tax (CGT). This means that employees will be required to pay CGT on any gains they make from selling their SIP shares.
Thirdly, SIPs may come with restrictions such as a lock-in period or limits on the number of shares that can be purchased or awarded. These restrictions can affect the tax treatment of the shares and may limit the options available to the employee.
And finally, When participating in a SIP, it is important to consider your exit strategy. You may need to pay tax on any gains made on the shares when you sell them, and there may be restrictions on when and how you can sell your shares.
Conclusion:
The first step in calculating the tax on a share incentive plan is to determine the value of the shares that you have been awarded; which is based on the market value of the shares at the time they are awarded. The taxation of a share incentive plan in the UK will depend on the type of plan and the specific details of the plan. Generally, the tax treatment of shares awarded through a SIP will fall into either the Income Tax or Capital Gains Tax categories. However, if you are still unsure of your tax liability on shares received through SIP, you may need the services of a professional services provider such as a Tax Accountant.
References:
Tax and Employee Share Schemes: Share Incentive Plans (SIPs) – GOV.UK