At Spring Budget 2023, the government announced that it would launch a call for evidence on the non-discretionary tax-advantaged employee share schemes, Save As You Earn (SAYE) and the Share Incentive Plan (SIP). The intent is to gain evidence on how the schemes are being used and whether they are meeting their policy objectives.

SIPs were a key part of the way employee ownership was structured when I first become involved with the Employee Owned community in 2012, before the introduction of Employee Ownership Trusts (EOT). The advice that I was given, working for a business looking at moving into employee ownership at that time, was to set up a trust to hold the majority shareholding and then set up a SIP to facilitate direct share ownership. The idea was to allow employees to share in the profits in a way that was tax efficient for them and give everyone some “skin in the game”.

EOTs come with their own mechanism for tax advantaged profit sharing with employees, in the shape of an annual allowance (£3,600 per employee) for tax free bonuses, so after their introduction SIPs started to slip off the radar. At the point of transition, transferring shares to an EOT ticked the boxes for all employee benefit, which in many cases was unlikely to exceed the £3,600pa threshold until after the debt to the Sellers was repaid. Sometimes a share incentive for senior team members would be introduced, often in the form of an EMI Scheme implemented after completion, but in most cases but all employee share schemes did not seem necessary.

Many of the businesses that transitioned to employee ownership in the early days of the EOT have now repaid or are close to repaying the debt to selling shareholders and with every year that passes, the number of businesses in this position increases. The uptake of EOTs, which began in 2014, really started to take hold after 2017, and it is these businesses that are reaching “financial freedom” now. Is it possible that with the freedom from vendor debt, and more profit to distribute to employees, the SIP may have a greater uptake from Employee Owned Businesses (EOBs)?

At Baxendale Employee Ownership we have now seen a number of our EOB clients introduce SIPs, after the founder debt is repaid; some of the reasons behind this include:

– Where businesses are distributing more than the £3600 per employee tax free bonus, a SIP allows more tax efficient distribution of profits to all employees

– Employers can grant free shares worth up to £3600 per employee per year, without income tax or NICs being incurred. Employees can also purchase shares by salary sacrifice and there is the option for employers to grant matching shares, on a ratio of up to 2:1 on purchased share.

– SIP schemes can have a positive impact on employee retention; employees must invest over a five-year period in order to gain the tax benefits, including a Capital Gains Tax free sale of their shares.

– Some businesses find that where employees hold shares directly, ownership feels more “real” to them. Hybrid schemes, where the majority shareholding is held by a trust, but all employees have buy in, can help EOBs create a culture of ownership.

More information about SIP schemes and how they work can be found on our website here.

If you would like to discuss how direct share ownership for employees might benefit your business, our advisers would be happy to talk to you.

If are using a SIP in your business and you would like to share your views as part of the call for evidence, you can access this here.

Emily Alston