Answers · UK 2025/26

How does a Share Incentive Plan (SIP) work and what are the tax benefits?

A SIP is an all-employee HMRC-approved share scheme with four components: Free shares (up to £3,600/year from employer, tax-free if held 5 years), Partnership shares (employee buys from pre-tax salary up to £1,800/year), Matching shares (employer matches up to 2:1), and Dividend shares. After 5 years all shares leave the plan entirely Income Tax and NI free.

Last updated: 10 June 2026Last reviewed: 10 June 2026How we verify

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A Share Incentive Plan (SIP) is an all-employee HMRC-approved share scheme that allows companies to give or sell shares to employees in a tax-advantaged way. It has four distinct components, which employers can choose to offer in any combination. Free shares: your employer can give you up to £3,600 of free shares per tax year. If the shares remain in the SIP for at least five years, no Income Tax or NI is payable on them. Removing them before three years means full Income Tax and NI on the original market value; between three and five years, a tapered charge applies. Partnership shares: you can use up to £1,800 of your pre-tax, pre-NI salary per year (or 10% of salary if lower) to buy shares in your employer. Because the money comes from gross pay, a basic rate taxpayer buying £1,800 of shares effectively pays only £1,080 net (saving £432 in Income Tax and £288 in employee NI at 8%). Again, holding for five years avoids Income Tax and NI on removal; less than three years triggers a full charge. Matching shares: when you buy Partnership shares, your employer can award you up to two free Matching shares for every Partnership share purchased. These follow the same five-year free / three-year tapered rule as Free shares. Dividend shares: dividends paid on SIP shares can be reinvested as additional shares within the plan (up to £1,500 per year). These shares must be held for three years to be free of Income Tax; reinvested dividends within the plan are not taxed when received. Capital Gains Tax: when you eventually sell SIP shares, CGT is calculated from market value at the date the shares left the plan (not from the original purchase price), with the £3,000 AEA available. SIP shares left in the plan until disposal (via the plan trustee) can also achieve CGT-free disposal in some circumstances. SIPs are available to all UK resident employees of a company, and employers offering a SIP cannot discriminate by excluding categories of employees.