When an employee is awarded shares under a Share Incentive Plan (SIP) there is no income tax liability for the employee or national insurance contributions (NICs) payable by either employee or employer at the time of the award.
This treatment also applies to dividend shares that are awarded where dividends are reinvested to purchase further plan shares.
The taxation of removing shares from a SIP depends upon how long the shares have been held.
The following points detail when shares can be taken out of a SIP and what tax may be payable.
Free and matching shares must normally be kept in the SIP for three years, but partnership shares can be taken out at anytime.
Shares MUST be taken out of the plan if an employee leaves the company and they may lose their free and matching shares if they leave within three years of receiving them unless leaving is due to redundancy, injury, disability, retirement or death.
Employees must keep their shares in a plan for five years to avoid any income tax or NICs on those shares.
Employees who take their shares out of a plan after three years but before five years will only pay tax and NICs on the lower of the initial value of the shares and the market value of the shares when taken out. This means any increase in value of the shares while in the plan will be free of income tax and NICs.
Employees who withdraw their shares from a plan within the first three years are liable to tax on the market value of the shares at the time they are withdrawn.
The shares will also be free of Capital Gains Tax (CGT) provided they remain within the SIP until they are sold. If the shares are removed from the SIP and subsequently sold then CGT will apply on any increase in value after their removal from the plan.
Further details of the Share Incentive Plan are available on the HMRC website.