A Share Incentive Plan (SIP) is an all employee plan under Schedule 2 ITEPA 2003 in which a trust holds company shares for staff. An employer can give up to £3,600 of free shares a year, employees can buy partnership shares out of gross pay up to the lower of £1,800 or 10% of salary, the employer can add up to two matching shares for each partnership share, and dividends can be reinvested. Shares kept in the plan for five years come out free of Income Tax and National Insurance, and shares sold straight out of the plan are free of Capital Gains Tax.

How does a SIP actually work?

The company sets up a trust, and the trustees acquire and hold the shares on behalf of each participant. Shares awarded under the plan are called plan shares, and the employee is not taxed when the beneficial interest passes to them on award (section 490 ITEPA 2003). The tax position is decided later, when the shares leave the plan, by how long they were held and why they came out.

A SIP must be open to every eligible employee who is a UK resident taxpayer, on the same terms, although each employee decides whether to take part. The rules can set a qualifying period of service, of up to 18 months for free shares. HMRC guidance at ETASSUM21120 also requires that directors and senior employees get no preferential treatment. The plan must be registered with HMRC, and an end of year employment related securities (ERS) return is due by 6 July after each tax year, including a nil return if nothing happened.

For the company, the costs of setting up and running the plan and of providing the shares are deductible for Corporation Tax under sections 987 to 989 CTA 2009. If the shares are unlisted, the HMRC Shares and Assets Valuation team can agree a value using form VAL230; an agreed SIP valuation can last up to six months unless a significant event, such as a dividend or a new share issue, happens first.

What are free shares?

Free shares are given without payment, up to £3,600 worth per employee in each tax year, valued at the award date as if any restrictions did not exist. Awards can be the same for everyone or varied by reference to performance under the performance allowance rules. Each award must carry a holding period of between three and five years, the same for all shares in that award, and the company cannot lengthen it once the award is made. The holding period ends early if the employee leaves. The plan can also provide that free shares are forfeited if the employee leaves, and the holding period does not prevent that.

How do partnership and matching shares work?

Partnership shares are bought with deductions from the employee’s gross pay, so no Income Tax or National Insurance is paid on the money used (section 492 ITEPA 2003). The annual limit is the lower of £1,800 or 10% of salary for the tax year, and the plan can exclude items such as overtime or bonus from salary for this purpose. If the plan sets a minimum deduction, it cannot exceed £10.

Deductions can be used straight away or collected over an accumulation period of up to 12 months, after which the trustees must buy the shares within 30 days. The company chooses whether the price is the value at the start of the period, at the award date, or the lower of the two. Partnership shares can never be forfeited and the employee can take them out at any time, though early removal is taxed as explained below.

Matching shares are free shares given in proportion to partnership shares bought, at a ratio set in the partnership share agreement that cannot exceed 2:1 by number of shares. They must be of the same class as the partnership shares, awarded on the same day and on the same basis to everyone, and they carry the same three to five year holding period as free shares.

What are dividend shares?

If the plan allows, dividends on plan shares can be used to buy more shares, called dividend shares. The reinvested dividend is not taxed provided the dividend shares stay in the plan for at least three years (section 493 ITEPA 2003). If they come out earlier for a reason other than a good leaver reason, the original dividend is taxed as dividend income in the year of removal. Dividends taken in cash are taxed like any other dividend.

What tax is due when shares come out of the plan?

Shares Removed within 3 years Removed in years 3 to 5 Removed after 5 years
Free and matching Income Tax on market value at removal (section 505(2)) Income Tax on the lower of value at award and value at removal (section 505(3)) Nothing (section 497)
Partnership Income Tax on market value at removal (section 506(2)) Income Tax on the lower of the pay used and value at removal (section 506(3)) Nothing (section 497)
Dividend Original dividend taxed as dividend income Nothing Nothing

No charge arises at all if the shares leave because employment ends through injury, disability, redundancy, a TUPE transfer, the employing company leaving the group, retirement or death (section 498 ITEPA 2003). Shares must come out of the plan when the employee leaves, so a resignation in year two can produce a full charge.

Where the shares are readily convertible assets, for example listed shares, the employer deducts Income Tax and National Insurance through PAYE. Otherwise there is no National Insurance, but the employee reports the income on a Self Assessment return or, if they do not normally file one, tells HMRC by 5 October after the end of the tax year.

Is there any Capital Gains Tax?

Shares sold while still in the plan are free of Capital Gains Tax however much they have grown (section 515 ITEPA 2003). Shares taken out and kept are treated as acquired at their value on the day they left the plan, so later growth is a capital gain. The employee avoids that by transferring them into an ISA within 90 days of taking them out, or into a pension directly from the plan when it ends. Gains outside those routes are taxed at the normal Capital Gains Tax rates.

How does this work for an employee?

Illustration only. An employee earning £30,000 joins a plan offering partnership shares with matching at 2:1. Ten per cent of salary is £3,000, so the £1,800 cap applies and they save £150 a month. Over the year they buy £1,800 of partnership shares and receive £3,600 of matching shares, all from gross pay or free.

  • If they keep everything in the plan for five years, nothing is taxed on removal, and nothing is taxed on a sale from the plan.
  • If they resign after four years, the partnership shares are taxed on the lower of the £1,800 of pay used and their value at removal, and the matching shares on the lower of £3,600 and their value at removal, unless the plan forfeits the matching shares on resignation.
  • If they are made redundant after two years, the good leaver rule means no Income Tax is due.

What mistakes come up most often?

  • Treating the five year point as automatic: the clock runs from each award, so a plan with annual awards has shares at different stages.
  • Forgetting that leaving the employer removes the shares from the plan and can trigger Income Tax and PAYE.
  • Assuming shares stay free of Capital Gains Tax once taken out of the plan and held.
  • Not keeping records of award dates and prices, which HMRC expects participants to keep.
  • Overlooking that partnership share deductions reduce National Insurance paid, which can affect some contributory benefits.
  • Missing the 6 July ERS return, which carries automatic penalties.

For how a SIP compares with discretionary options, see Enterprise Management Incentives and the Company Share Option Plan, and the overview of employment related securities. Sharesave, the other all employee scheme, is covered in Save As You Earn schemes.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.