How does a Share Incentive Plan (SIP) work in the UK?

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A Share Incentive Plan (SIP) is a government-approved employee share scheme that lets employees acquire shares in their employer company with significant income tax and National Insurance advantages. All employees must be offered the plan on the same terms. Four components 1. Free Shares The employer can award up to GBP 3,600 of shares per employee per year. No income tax or NI is payable at the time of award or while the shares are held in the plan. If shares are withdrawn after 5 years, no income tax arises at all. Withdrawn between 3 and 5 years: taxed on lower of original market value and current value. Withdrawn within 3 years: taxed in full. 2. Partnership Shares Employees can use up to GBP 1,800 (or 10% of salary if lower) per year of their gross (pre-tax) salary to buy shares. Because the money comes from pre-tax salary, the employee effectively buys shares at a discount equal to their income tax and NI rates. At 20% IT and 8% NI (2026/27 employee rate), the effective saving is around 26-28%. 3. Matching Shares The employer can award up to 2 matching shares for every 1 partnership share purchased. These are free shares linked to the partnership share purchase and are subject to the same holding period rules. 4. Dividend Shares Dividends paid on SIP shares can be reinvested into further shares (dividend shares) free of income tax. The dividend shares must be held for 3 years. CGT considerations Shares withdrawn from the SIP carry a CGT base cost equal to their market value at the date of withdrawal. Any subsequent gain after leaving the plan is subject to CGT in the normal way. SIP as a retention tool Most plans have a "forfeiture" condition: if the employee leaves within a set period (typically 3 years), they may forfeit free and matching shares. This makes SIPs an effective retention mechanism alongside their tax advantages.

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