Share incentive plan: the four share types, and the five year clock

A share incentive plan is the only tax advantaged UK share scheme that must be offered to every employee, and the one most often explained badly. Staff are told the shares are "tax free", then taxed when they cash them in. The rules turn on one date, and nobody writes the date down. This article covers the four kinds of SIP share, the cap on each, the holding period, and what a participant pays at each point. It is about the United Kingdom only. It is general information, not tax or financial advice, and a share scheme needs professional advice from someone who has read your plan rules.

The invitation, the service qualification and the leaver step form a process with dates, participants and approvals. See how New Dynamics workflows let you shape stages, reminders and approvals around how your organisation works.

What a share incentive plan is

A share incentive plan, usually shortened to SIP, is a trust based scheme through which an employer gives or sells its own shares to employees with Income Tax and National Insurance advantages. The governing law is Schedule 2 to the Income Tax (Earnings and Pensions) Act 2003. HMRC calls a qualifying plan a Schedule 2 SIP, and the tax rules sit in sections 488 to 515 of the same Act. HMRC's share scheme manual at ETASSUM29010 says a company "can choose to offer qualifying employees one or a combination of four types of plan shares".

HMRC's Employee Share Scheme statistics, published on 3 July 2026, report that "SIP is the largest scheme by cost of tax relief with £470 million in the tax year ending 2025", with the average value of shares awarded "much lower at £220 per award". Our HR statistics hub has the wider pay and reward numbers.

The four kinds of SIP share, and the cap on each

GOV.UK's guidance on Share Incentive Plans states that "There are 4 ways you can get shares under SIPs", and gives the cap on each.

• Free shares. "Your employer can give you up to £3,600 of free shares in any tax year." Paragraph 35 of Schedule 2 tests that cap on "their market value on the date on which they are awarded", not on later value.
• Partnership shares. "You can buy shares out of your salary before tax deductions. There's a limit to how much you can spend, either £1,800 or 10% of your income for the tax year, whichever is lower." Paragraph 46 puts both in statute and lets a plan set lower ones.
• Matching shares. "Your employer can give you up to 2 free matching shares for each partnership share you buy." Paragraph 60(2) adds the detail that matters: "The ratio must not exceed 2:1 and must be applied by reference to the number of shares." It counts shares, not value.
• Dividend shares. Dividends on plan shares can buy more plan shares, "but only if your employer's scheme allows it". There is no annual cash limit. The £1,500 reinvestment cap in paragraph 64 was removed by Finance Act 2013, legislation.gov.uk now shows that paragraph as omitted, and no official source publishes a replacement figure.

Every limit is per tax year, and a UK tax year runs from 6 April to 5 April. All three caps can be changed by Treasury order without a new Act, under paragraphs 35(2A), 46(6) and 60(4). The figures above are in force now: legislation.gov.uk records paragraph 46 as "up to date with all changes known to be in force on or before 07 November 2026". The £3,600 and £1,800 amounts have stood since 6 April 2014.

The holding period

Paragraph 36(2) requires that the holding period for free shares "must be a period of at least 3 years but not more than 5 years, beginning with the date on which the shares in question are awarded", and "must be the same for all shares in the same award". During it the participant is bound by contract to leave the shares with the trustees and "not to assign, charge or otherwise dispose of the beneficial interest in the shares".

A company may set a different period for a later award, but paragraph 36(3)(b) stops it "increasing the holding period specified in respect of free shares that have been awarded". Paragraph 61 applies the same period to matching shares; paragraph 67 applies it to dividend shares "except that the holding period must be 3 years". Partnership shares have none at all, and that freedom is where the tax bills come from.

The tax at each point

One clock, four readings.

On award, nothing is charged. Section 490 ITEPA 2003 provides that the employee "is not liable to income tax on the value of the beneficial interest in the shares that passes to the employee at the time of the award or acquisition". Section 492 adds that an employee is not liable "on any amount of the employee's salary which is deducted as partnership share money". That money leaves gross pay, so there is no National Insurance on it either.

Out inside three years, and the full exit value is taxed. Section 505(2) charges "the market value of the shares at the exit date" for free and matching shares, and section 506(2) does the same for partnership shares.

Out between three and five years, and the lower figure is taxed. Section 505(3) charges "whichever is the lesser of (a) the market value of the shares at the award date, and (b) the market value of the shares at the exit date". Section 506(3) charges the lesser of "the amount of partnership share money used to acquire the shares" and the exit value. A share that has risen is taxed on the original figure, so the growth escapes Income Tax.

Out after five years, and there is nothing to pay. GOV.UK: "If you get shares through a Share Incentive Plan (SIP) and keep them in the plan for 5 years you will not pay Income Tax or National Insurance on their value." HMRC's table at ETASSUM29020 cites section 497 ITEPA 2003, and sums up the design in a line worth repeating to staff: "The longer the shares are kept in the SIP, the less tax and NICs will be payable when the shares are taken out of the plan."

Dividend shares run on a three year clock. ETASSUM29010 says a participant "will not have to pay tax on these reinvested dividends as long as the shares bought with the dividends are held in the plan for at least three years"; come out earlier and section 394 of the Income Tax (Trading and Other Income) Act 2005 treats a distribution as made, taxed as dividend income. Capital Gains Tax rewards patience too: GOV.UK states you will not pay it on shares "sold, if they were kept in the plan until the point of sale".

Good leavers and bad leavers

Paragraph 36(5) provides that if a participant "ceases to be in relevant employment" during the holding period, "the participant's obligations with respect to that period come to an end". The shares come out. Whether a charge follows is a separate question.

Section 498 ITEPA 2003 removes the charge in what HMRC's guidance at ETASSUM28160 calls the "good leaver" cases: injury or disability, "being dismissed by reason of redundancy", "a relevant transfer within the meaning of the Transfer of Undertakings (Protection of Employment) Regulations 2006", a change of control ending an associated company's status, "the participant's retirement", or "the participant's death".

Anyone else is a bad leaver only in the sense that no exemption applies: a resignation or any other dismissal leaves the sections 505 and 506 charges in place, measured on the exit date. Section 505(6)(a) adds that no liability arises "on the forfeiture of free or matching shares".

National Insurance, and the corporation tax deduction

National Insurance follows the Income Tax charge, but only for shares that can be turned into cash. ETASSUM29040 explains that where the shares "can be readily converted into cash (for example, if they are listed on a recognised stock exchange ...) then the employer will deduct the income tax and NIC under PAYE". Where they are not readily convertible assets, "there will be no NICs to pay, but the employee may still have income tax to pay", and an employee outside Self Assessment must tell HMRC "by 5 October after the end of the tax year in which they were withdrawn from the SIP". Dividend shares "are not subject to NICs".

For the employer, ETASSUM29070 confirms that the costs of a Schedule 2 SIP, including the provision of shares (section 989 Corporation Tax Act 2009) and the plan's establishment and operation (sections 987 and 988 CTA 2009), are "specifically allowable as a deduction in computing the company's profits for corporation tax purposes".

Open to all employees, and the service qualification

A SIP cannot be selective. Paragraph 8(1) requires the plan to provide that every employee who meets the eligibility rules and is a UK resident taxpayer "is eligible to participate in the award, and is invited to do so". Paragraph 8(3) bars any feature "which has or is likely to have the effect of discouraging any description of employees", and paragraph 9(1) requires that everyone invited "must be invited to participate on the same terms", with free shares varied only by remuneration, length of service or hours worked.

An employer may impose a service qualification, but a capped one. Paragraph 16 sets the maximum qualifying period at "not more than 18 months" for free shares, the same for partnership shares where there is no accumulation period, and "not more than 6 months ending with the start of the accumulation period" where there is one.

The trust, self-certification and the notification deadline

The shares must be held by trustees. Paragraph 71(1) requires the plan to "provide for the establishment of a body of trustees consisting of persons resident in the United Kingdom", and paragraph 71(3) requires their functions to be regulated by a plan trust "constituted under the law of a part of the United Kingdom" under a written trust instrument.

HMRC no longer approves plans in advance. ETASSUM20110 gives the position: "From 6 April 2014 a SIP is a 'Schedule 2 SIP' if the company has given notice of the plan to HMRC and confirmed that it meets the requirements of parts 2 to 9 of Schedule 2." The deadline is easy to miss. "Notice must be given by 6 July following the end of the tax year in which the first award of shares is made under the plan," and a plan notified later qualifies only from the tax year in which the notice is given. Paragraph 81B(4)(b) then requires an annual return each tax year, due "on or before 6 July in the following tax year".

A SIP is one of four tax advantaged schemes. Save As You Earn, the Company Share Option Plan, Enterprise Management Incentives and an employee ownership trust each do a different job under different rules.

Frequently asked questions

What is a share incentive plan?

A share incentive plan, or SIP, is a UK trust based employee share scheme governed by Schedule 2 to the Income Tax (Earnings and Pensions) Act 2003. It can offer free, partnership, matching and dividend shares, with tax advantages that grow the longer the shares stay in the plan.

How much can an employee get through a SIP in a year?

GOV.UK gives up to £3,600 of free shares in any tax year, partnership share purchases of either £1,800 or 10% of income for the tax year whichever is lower, and up to two matching shares per partnership share bought. Paragraphs 35, 46 and 60 of Schedule 2 set the same limits.

How long must SIP shares be held?

Paragraph 36(2) of Schedule 2 requires at least three years and not more than five from the award date for free shares, and paragraph 61 applies it to matching shares. Dividend shares have a three year period under paragraph 67. Partnership shares have no holding period, but tax may follow an early withdrawal.

What tax is due if SIP shares are taken out early?

Sections 505(2) and 506(2) ITEPA 2003 charge Income Tax on market value at the exit date for shares leaving within three years. Between three and five years, sections 505(3) and 506(3) charge the lower of the award value, or the money paid, and the exit value.

What happens to SIP shares when someone leaves?

The holding period ends when the participant stops being in relevant employment, under paragraph 36(5), so the shares come out. Section 498 ITEPA 2003 removes the Income Tax charge where the reason is injury or disability, redundancy, a TUPE transfer, a change of control, retirement or death.

Can an employer offer a SIP to senior staff only?

No. Paragraph 8(1) requires every eligible UK resident taxpayer employee to be invited, and paragraph 9(1) requires the same terms for all. An employer may require up to 18 months of service before an award of free shares, under paragraph 16.

Your next step: write the dates down

1. Decide which of the four share types your plan will use, and record the per employee limit you will apply, which may be lower than the cap.
2. Fix the holding period for the next award, between three and five years, and tell participants the exact date on which the five year position is reached.
3. Put the service qualification in writing, within the paragraph 16 caps, and check it discourages no group of employees from joining.
4. Diarise 6 July after the tax year of your first award for the notification, 6 July every year after for the annual return, and add a leaver step that asks whether section 498 applies.

For the policy structure these decisions sit inside, read and download our compensation policy guide. The guide is free to read, and the PDF uses our short download form.

Want the enrolment, service qualification and leaver steps to run as a process with owners and dates rather than a spreadsheet nobody maintains? Book a New Dynamics demo and bring your current plan rules. You can also email contact@new-dynamics.com.