Share Incentive Plans (SIPs) for Private Companies: Benefits, Challenges and Practical Considerations
A Share Incentive Plan (SIP) is a tax approved all-employee share scheme that gives staff the opportunity to become shareholders. Unlike a share option scheme, employees hold actual shares from the outset (usually for at least five years), creating a direct connection and alignment between individual contributions and business success.
Whilst SIPs are widely used by Listed companies, they can also provide significant benefits for private businesses looking to strengthen employee engagement, improve retention and foster a culture of ownership. There are, however important practical considerations that need to be weighed up before implementation.
How does a Share Incentive Plan (SIP) work?
Employees can receive shares in three different ways:
- Partnership Shares – employees purchase shares out of gross pay, free of income tax and NICs
- Free Shares – awarded to employees at no cost and without income tax or NICs
- Matching Shares – up to two extra free shares for every Partnership Share purchased by an employee
In addition, dividends paid on any of these shares can be paid as additional shares (Dividend Shares), instead of cash and will be free of income tax.
Which companies can use a SIP?
Any ‘independent’ company (not under the control of another company) can operate a SIP. The arrangement is available to both Listed and private companies.
In practice, Listed companies often operate SIPs for all their employees (as well as discretionary share plans). Because there is an existing market for buying and selling their shares. Listed companies often also offer both Partnership and Matching Shares.
Private companies can and (less commonly) do also operate SIPs but the absence of a readily available market for their shares creates additional administrative and liquidity considerations that need careful planning, so it’s important to evaluate the benefits and associated challenges.
The benefits of SIPS for Private Companies
- Creating genuine employee ownership - Direct shareholding gives employees a real stake in the business
- Rewarding business growth - As the business grows in value, employees share in that success. This can encourage behaviours that support performance, productivity and long-term value creation
- Supports retention and commitment - particularly where Free or Matching Shares are at risk of forfeiture in for certain events
- Linking rewards to performance - Free Shares can be linked to performance conditions either company wide or for a particular business unit
- Tax advantages - Private companies can benefit from no employer NICs on Partnership Shares and corporation tax relief on the cost of Free or Matching Shares
The challenges of SIPs for Private Companies
- Administration complexity - Many private companies choose to administer these arrangements internally, which can place additional demands on management teams. This would include maintaining participant records, dealing with leavers and complying with ongoing reporting obligations.
- Ongoing valuation requirements - Since the shares to be used are unlisted each round of awards or purchases of SIP shares needs to be preceded by a share valuation. This valuation then needs to be approved by HMRC before the SIP shares can be allocated. Under the SIP legislation the shares may also have to be valued at other times, for example, in certain leaver situations or withdrawals of shares from the SIP where tax is due.
- Less frequent share awards - This administrative burden means that most private companies would not offer frequent or regular Partnership or Matching Shares. One-off or annual awards of Free Shares or purchases of Partnership Shares are common.
- Limited share liquidity - The lack of a market for employees to sell their shares, means companies need to consider how employees will realise the value from their shares. Solutions could include:
- creating an ‘internal market’ – this typically involves establishing another type of trust, known as an ‘Employee Benefit Trust’ (EBT) funded by the company, and using that to act as a willing buyer and seller of the SIP shares (although this will have a cost implication)
- using PISCES (‘Private Intermittent Securities and Capital Exchange System’) – this is a new regulated UK market framework that allows private companies to offer their employees periodic trading windows for their existing shares.
- unlike SIPs for Listed companies, in practice employees will often use the SIP in a private company as a long-term ‘retirement’ tool, leaving shares in the SIP well beyond the 5 years they have to benefit from the full tax advantages
Is a SIP the right choice for your business?
Whilst SIPs can be a highly effective way to broaden employee ownership and align employee and shareholder interests, they are not suitable for every business.
The right approach will depend on factors such as company size, ownership objectives, growth plans, administrative capacity and the availability of future liquidity opportunities. For some businesses, alternative share schemes or employee ownership structures may provide a better fit.
Careful planning and advice are therefore essential to ensure that any share plan supports both the company's strategic goals and employee engagement objectives.
For private companies looking to create a stronger ownership culture, a Share Incentive Plan can be an attractive and tax-efficient solution. However, balancing the benefits of employee share ownership against the practical challenges of valuation, administration and liquidity is key. Taking the time to evaluate these factors at the outset can help ensure the chosen arrangement delivers lasting value for both employees and shareholders.
We're here to help you choose the right employee share plan
Choosing the right employee share plan can have a lasting impact on engagement, retention and business performance. But with a range of options available, it's important to find the approach that best supports your company's objectives and culture.
If you'd like to discuss whether a Share Incentive Plan could work for your business, contact our trusted experts, for an informal, no-obligation conversation.
Contact us by filling in the form at the top of the page, email info@postlethwaiteco.com or call us on 02038189420.