In our latest Stock 'N Roll podcast episode, we sat down with Chris Fallon, Legal Director at Tapestry Compliance, to demystify two of the most prominent all-employee schemes in the UK: the Share Incentive Plan (SIP) and the Save-As-You-Earn (SAYE) plan. Drawing on his extensive expertise, this blog breaks down how these plans work, their unique benefits, and what companies need to know to implement them successfully.
Employee share plans are a proven tool for aligning employee and shareholder interests, boosting engagement, and driving long-term growth. For companies operating in the United Kingdom, the landscape is particularly rich with opportunity, thanks to a framework of tax-advantaged schemes developed over the last 50 years. These plans offer significant tax relief, making them a powerful incentive for employees.
Why the UK Stands Out in Employee Ownership
The UK has long been a pioneer in promoting employee share ownership, creating a sophisticated and generous ecosystem of tax-advantaged plans. Unlike the standard tax treatment, where acquiring shares triggers an immediate income tax charge on any discount or value received, these government-backed schemes reduce or even eliminate that burden.
The UK framework includes four main plans:
- Share Incentive Plan (SIP): An all-employee plan focused on upfront share acquisition.
- Save-As-You-Earn (SAYE): An all-employee savings and option plan.
- Company Share Option Plan (CSOP): A discretionary option plan for select employees.
- Enterprise Management Incentive (EMI): A discretionary option plan aimed at smaller, high-growth companies.
While CSOP and EMI are discretionary, SIP and SAYE are designed for broad-based participation, requiring companies to offer them to all eligible employees on similar terms.
Save-As-You-Earn (SAYE): Save Now, Own Later
The SAYE plan, also known as ShareSave, is a popular and long-standing scheme that combines a savings contract with a share option.
How it Works:
- The Option: Employees are granted an option to buy company shares in the future, typically after a three or five-year period.
- The Price: The purchase price (exercise price) is set at the time of grant and can be discounted by up to 20% of the share's market value.
- The Savings: Employees save a fixed amount each month from their post-tax salary over the contract period. At the end of the term, they use these savings to exercise their option and buy the shares.
The Tax Advantage: The primary benefit of SAYE is that when an employee exercises their option, the growth in the share's value—the difference between the market value at exercise and the discounted option price they pay—is completely exempt from income tax and social security contributions. The only tax due is Capital Gains Tax (CGT) when the employee eventually sells the shares, and only on the growth in value from the date of acquisition.
Read more about the SAYE scheme in our detailed blog here.
Share Incentive Plan (SIP): Immediate Ownership with Powerful Tax Breaks
Introduced in 2000, the SIP is an exceptionally tax-efficient plan that allows for the immediate acquisition of shares. It is structured around a specially created trust and has four distinct components that can be used in combination:
- Free Shares: Companies can award each employee up to £3,600 worth of free shares in any tax year.
- Partnership Shares: Employees can choose to buy shares, known as Partnership Shares, directly from their pre-tax (gross) salary, up to a limit of £1,800 per year. This provides an immediate tax and social security saving.
- Matching Shares: To further incentivize participation, companies can offer up to two free "Matching Shares" for every one Partnership Share an employee buys.
- Dividend Shares: Any dividends paid on shares held in the SIP trust can be reinvested to purchase additional shares, which also benefit from tax advantages if held for at least three years.
- The Tax Advantage: The SIP offers one of the most generous tax wrappers available. If shares are held in the SIP trust for five years, they can be sold completely free of income tax and Capital Gains Tax. This makes it a fantastic vehicle for long-term, tax-free growth.
Key Considerations for Implementation
- All-Employee Principle: Both SIP and SAYE must be offered to all eligible UK-resident employees on "same or similar terms." While companies can set a minimum service period to qualify, the core offer must be consistent for all participants.
- Trust Requirement: A SIP requires a UK-resident trust, managed by a trustee, to hold the shares on behalf of employees and ensure all statutory rules are met.
- Communication is Crucial: Participation rates for contributory plans like SAYE and the partnership element of SIP often start at around 20%. Clear, consistent communication that explains the benefits and mechanics is vital to drive engagement. As employees see their colleagues profit from the plans, participation naturally grows over time.
- Reporting and Administration: All UK tax-advantaged plans must be registered with HMRC, and all grants and events must be reported annually. Failure to comply can jeopardize the tax relief for all participants, making professional advice and administration essential.
Read our comprehensive guide to understand the SIP here.
Conclusion: A Strategic Investment in Your People
While navigating the rules of UK tax-advantaged plans requires careful planning and administration, the rewards are substantial. Both SAYE and SIP offer a structured and highly effective way to foster a culture of ownership, align your entire workforce with company goals, and provide a valuable financial benefit that goes far beyond salary.
As Chris Fallon emphasized, seeking expert advice is the first step to ensuring your plan is compliant, effective, and truly valued by your employees. By leveraging these powerful schemes, your company can build a more engaged, motivated, and invested team.
To learn more about designing and implementing employee share plans, explore our Resource Hub or get in touch with our team today.
