Tax Regulations for Share Incentive Plans (SIPs) and Lump Sum Payments in Employment after Setting up a Limited Company UK


04 Jan

There are different approved tax efficient share schemes for employees which includes SAYE Share Option Schemes, Enterprise Management Incentives (EMI), Company Share Option Plans (CSOP) and Share Incentive Plans (SIPs). The tax implications in the case of the share incentive plan (SIP) will be brought under discussion in the blog along with the summary of the tax advantages of all the schemes as mentioned above and the lump sum payments with respect to employment will be discussed. SIP scheme states that after create limited company UK the employees may get free shares of worth £3000 a year, they can also buy the partnership shares of up to £1500 and the employers have the authority to provide matching shares of worth £3000 and once the holding of shares has been done for five years, there is no charge of NIC or income tax upon removing the shares from the plan.

Implications of Tax in Share Incentive Plans (SIPs) on giving and acquiring Shares

After setting up a limited company UK when the employees get the shares (under the plan), there is no charge of income tax or national insurance.

Normally, the holding of free and matching shares should be done for at least three years in a plan. If the withdrawal of shares is done within the duration of three years due to the reason of employee leaving, there is then a charge to income tax in the form of particular employment income and NIC on the shares’ market value at the time of withdrawal. In the case that the shares are taken out of the plan within the duration of three to five years, there is a charge to NIC and income tax depending on the lower of the shares’ initial value and their value at the withdrawal day. Hence, there is no charge of income tax or NIC upon an increment of the value. Also, there is no tax or NIC applicable in the case of retirement or redundancy. Once the holding of shares has been done for five years, there is no charge of NIC or income tax upon removing the shares from the plan.

The removal of partnership shares can be done at any time. If the holding of shares is noted for less than three years, there is a charge to NIC and income tax on the market value at the time of the removal of shares. If the removal of shares takes place within 3 to 5 years, the basis of the charge to income tax and NIC is the lower of salary that is used to purchase the shares and the market value at the removal date. Once the holding of partnership shares has been done for five years, there is no charge of NIC or income tax upon removing the shares from the plan.

Exemption for Dividends Tax used to obtain the Dividend Shares

Under the condition that the usage of dividends is done to obtain additional shares in the company that are then held in the plan for a duration of three years, the dividends on shares included in the plan are free from tax. The entitlement to matching or partnership shares is not affected by the dividend shares.

A percentage of dividends (that can be 100%) may be specified by a company that may be utilized for the acquisition of dividend shares. Note that this percentage can be altered from time to time.

Implication of Tax upon Sale of Shares

If the shares are removed from a plan and sold instantly, then there is no charge to capital gains tax (CGT) on these shares. The only case in which the occurrence of a CGT charge can be noted is when the sale is made to the extent that there is an increment in the value of shares after their withdrawal from the plan.

Conditions for Share Incentive Plans

The shares that are involved in a plan should be fully paid irredeemable ordinary shares of a reg UK ltd company either not under the control of another company or included in the list of a recognized stock exchange or in its subsidiary.

After create limited company UK the establishment of a plan by a company which is the controller of other companies, may extend the plan to any or all of the other companies under its control. Such a plan is referred to as a group plan. It should be noted that there is no obligation to include all the components in a plan, the inclusion of only free shares can be sufficient.

All the full time and part time employees of the company should be given a chance for the participation in the plan. The specification of an employment period must be done that should be at least equal to a duration of 18 months or less. The satisfaction of any specified minimum period can be done by doing work for any company existing within the group.

Costs for Share Incentive Plans

A subtraction in the calculation of profits for the company is given for:

  • The costs to set up and the administration of the plan.
  • The costs of provision of shares to the extent that the costs become more than the contributions of the employees.
  • The payment of interest made by the trustees on borrowing for the acquisition of shares where the company meets the costs of trustees.
  • The gross salary whose allocation is done by the employees in order to purchase the partnership shares.
  • The market value of matching and free shares when their acquisition is done by the trustees.

Summary of Approved Tax Efficient Share Schemes

The following are the approved share schemes for an employee working in a reg UK Ltd company:

  • SAYE is an option scheme for all employees with the tax benefits including tax free savings bonus, CGT on selling the shares and no income tax or NIC on exercise.
  • The CSOP is also an option scheme for selected employees with the tax advantages including CGT on selling the shares and no NIC or income tax on exercise.
  • The EMI is yet another option scheme for key employees including the tax benefits of CGT on selling the shares and no NIC or income tax on exercise unless granted at a discount
  • The last scheme is the SIP which is a gift from employer or a purchase by employee for all employees including the tax benefits of CGT upon selling the shares, favorable charge of income tax upon the holding of shares for 3 years and above and no NIC or income tax if the holding of shares is done for 5 years and above.

Lump Sum Payments

When an employment ends, the payments are made that can be fully liable to tax, exempt or partially exempt. Normally, the payment which is exempt is the first £30,000 of a genuinely ex gratia payment upon termination.

Employment Termination Payment

The payments upon termination of the employment can be exempt entirely or partly, or can be completely chargeable.

Termination Payments that are Exempt

The payments upon termination which are exempt are described below:

  • Lump sum payments from the pension schemes whose registration has been done.
  • Payments made on the unfortunate events of injury, disability or a death caused by an accident.
  • Legal costs that the employee gets recovered from the employer following legal action for the recovery of the compensation for loss employment, in which case the order of the costs is given by the court or the costs are acquired as result of settlement in the court and the payment of the costs is made directly to the solicitor of the employee as a part of the settlement.

Termination Payments Fully Liable to Tax

There are some payments that are fully taxable as general earnings, generally including the ones to which the employee is contractually entitled. The terminal bonuses or the payments for the performance of work or for doing extra work during a notified period, payments in lieu of notice as stated in the original contract, or for the extension in a period of notice are hence taxable in full. Another payment that is also taxable in its entirety is the one that is made by one employer for the induction of an employee to take up employment with some other employer.

Another important term is the restrictive covenant, where upon leaving an employment or at some other event, an employee may opt for the acceptance of limitation on their future conduct or activities performed in return of a payment. Such payments are liable to tax in the form of general earnings. However, the acceptance of a payment in its entirety and the final settlement of any claims the employee may have against the employer is not liable to tax automatically under this rule.

Termination Payments Partly Liable to Tax

We discussed above the payments that were taxable under the general earnings rule as they are given in return of performance of duties. There are some termination payments that are given for purposes other than the performance of duties and hence, they are not liable to tax in the form of general earnings, rather their taxation is done in the form of employment income. These are often known as the ex gratia payments and are partly exempt out of which the first £30,000 is exempt and the taxation of any excess is done in the form of employment income.

What are the rules for benefits provided upon termination?

The taxation of the payments and other benefits whose provision is done at the termination of employment or a change in the employment terms is done in the year in which they are received. In this case, by received, it is meant that when its payment is made or the recipient gets the entitlement of it for cash payments or when it is used or enjoyed as non-cash benefits.

The consideration of all the payments (cash and non-cash) made to the employee on the event of termination should be done. The taxation of the non-cash benefits takes place by reference to their equivalent of cash according to the normal benefit rules. Hence, if a company car continues to be made available to an ex-employee for a further year after redundancy, their taxation will be done on the same value of benefit as if they had been a part of the employment. The normal exemptions are applicable such that the continued use of one mobile phone and training related to work will be exempt.

Particular Scenarios and Issues

After open a company in UK the payments made in the form of compensation for a loss of office are regarded nationally by the HMRC but the payment which are made on the retirement or death (not accidental death) are regarded as the lump sum payments according the non-registered pension schemes, and hence their taxation is to be done completely. The exemption of £30,000 applies in the scenario where the payments amount to unfair dismissal.

The allocation of the £30,000 exemption limit is done to the earlier benefits and payments if the termination package is the one which is partially exempt. In any specific year, the allocation of exemption is done to cash payments prior to the non-cash benefits.

The employers are supposed to report the settlements upon termination including the benefits to the HMRC by the July 6th, following the end of the tax year. There is no requirement of a report if the package entirely consists of cash. Employers should also give a notification to the HMRC by the settlements date which may become more than £30,000 over their lifetime.

Rules for Other Lump Sum Payments

In the case where the acquisition of lump sums is not done in connection with the termination of employment but are received otherwise, their taxation will then be done if they are derived from the employment. The examples include the taxation of a payment made as a result of change in the terms of employment and a golden hello, that is a one-off payment made for someone’s encouragement so that they may join a new employer. Since it is a reward for the services to be performed in future, the charge of both tax and NIC is applicable.


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