Designing a Share Incentive Plan (UK)

Note: Want to skip the guide and go straight to the free templates? No problem - scroll to the bottom.
Also note: This is not legal advice.

Introduction

Share incentive plans are becoming an increasingly popular way for companies in the UK to incentivise, engage and reward their employees. Offering a range of benefits to both employers and employees alike, share incentive plans can be highly advantageous when it comes to motivation, retention, recruitment and long-term compensation.

The Genie AI team has put together a guide on designing your own share incentive plan which is available today. With this step-by-step guidance, you don’t need to be an expert lawyer or have a Genie AI account - our open source template library allows you access to millions of datapoints that teach our artificial intelligence what a market-standard share incentive plan looks like. This means anyone can draft and customize high quality legal documents with confidence.

Share incentives give employees the opportunity to own a stake in the company they work for; this often leads to feelings of ownership and responsibility among staff members who feel invested in the success of their workplace - meaning greater engagement and loyalty with potential reductions in employee turnover too!

Employers may also benefit from tax breaks by offering their workers shares as part of an incentive package; plus it’s possible for those same rewards to act as long-term compensation - potentially providing steady streams of income or lump sums if the value of shares increases over time - something that can be attractive prospects for skilled professionals looking to join or stay with a company.

Finally, taking advantage of tax regulations while offering potential capital gains or income from dividends as part of an employee’s package could go towards making shares more attractive than ever before; not only will employers benefit from lower taxes but it also shows how serious they are about investing in staff development too!

In conclusion, share incentives play an important role when it comes creating trust between companies and their employees as well as ensuring worker loyalty - so understanding why they are so beneficial is key if you’re looking at introducing them into your own business model. For more information on how you can use Genie AI’s community template library today and access our step-by-step guide on designing your own share incentive plan without needing any prior legal knowledge or experience, read on below!

Definitions (feel free to skip)

Objectives: Goals or aims.
Risks: Potential problems or dangers.
Legal requirements: Rules or regulations that must be followed.
Evaluating: Assessing or examining.
Vesting periods: The length of time before an employee can exercise their right to receive a benefit.
Restrictions: Limitations or constraints.
Payment scheme: The method of payment used.
Tax implications: The effects of taxes on a transaction.
Record-keeping: Keeping track of data or information.
Communication plan: A plan to ensure the exchange of information between people.

Contents

• Defining the objectives of a share incentive plan and assessing the associated risks
• Understanding the legal requirements for setting up a share incentive plan
• Researching the applicable laws and regulations in the country and any other countries where the plan applies
• Seeking professional advice from tax consultants and lawyers
• Determining which type of plan would be most suitable for the company
• Evaluating the company’s financial and operational situation
• Considering the objectives of the plan and the associated risks
• Establishing the rules and regulations for the plan
• Defining the rights and obligations of the participants
• Specifying the time period for the plan
• Establishing the conditions for eligibility, such as minimum tenure or performance criteria
• Establishing the terms and conditions of the plan
• Defining the types of shares to be offered
• Setting the vesting periods and restrictions
• Choosing the appropriate payment scheme
• Evaluating the different options available
• Considering the tax implications for the employees and the company
• Establishing the tax implications for the employees and the company
• Determining the applicable tax rates
• Establishing the appropriate withholding tax
• Setting up a system for monitoring the plan and its performance
• Setting up a record-keeping system
• Establishing a system for tracking employee participation
• Establishing a system for communication between employees and employers
• Developing a communication plan
• Ensuring employees are informed of their rights and obligations

Get started

Defining the objectives of a share incentive plan and assessing the associated risks

• Identify why you want to set up a share incentive plan - what are the objectives?
• Consider the risks associated with a share incentive plan, e.g. legal, financial, and reputational
• Talk to your employees to understand their needs and feedback
• Discuss the objectives and risks with your board and other stakeholders
• Establish a timeline and budget for setting up the plan

Once you have identified the objectives, assessed the risks, and discussed the plan with your board and other stakeholders, you can move on to the next step - understanding the legal requirements for setting up a share incentive plan.

Understanding the legal requirements for setting up a share incentive plan

• Familiarize yourself with the laws and regulations in the UK and any other countries where the plan applies
• Research the requirements for setting up a share incentive plan, such as the types of plans available, eligibility criteria for participants, and any associated tax or regulatory implications
• Consult with a legal advisor to ensure that the plan complies with relevant laws and regulations and is acceptable to HM Revenue & Customs
• Confirm that the plan is structured in the most tax-efficient way possible
• Draft a document outlining the key terms and conditions of the plan
• Once you are confident that the plan meets all legal requirements, you can move on to the next step.

Researching the applicable laws and regulations in the country and any other countries where the plan applies

• Check UK Government legislation and regulations for the specific rules and regulations regarding share incentive plans
• Check any other applicable countries’ legislation and regulations regarding share incentive plans
• Make sure you understand any relevant tax implications in each country
• Research the tax treatment of share incentive plans in each country
• Make sure you understand the tax implications of any employee share awards
• Make sure you understand the legal and regulatory requirements for issuing shares to employees
• Make sure you understand the requirements for reporting to the relevant authorities

Once you have completed this research, you will have a better understanding of the legal framework for setting up a share incentive plan in the relevant countries.

Seeking professional advice from tax consultants and lawyers

• Research and identify a tax consultant and lawyer who have experience with designing share incentive plans in the UK
• Develop a list of questions to ask the tax consultant and lawyer about designing a share incentive plan
• Meet with the tax consultant and lawyer to discuss the specifics of the plan and any questions you have
• Ask the tax consultant and lawyer for advice and recommendations about what type of plan would be most suitable for the company
• Ensure that the tax consultant and lawyer understands all relevant laws and regulations in the UK and any other countries where the plan applies
• When the consultation is over, review the advice and recommendations that you received and determine the next steps
• Mark this step as complete once you have received advice and recommendations from the tax consultant and lawyer and have determined the next steps to take.

Determining which type of plan would be most suitable for the company

• Identify the different types of share incentive plans available, such as Enterprise Management Incentives (EMI) and Save As You Earn (SAYE)
• Consider the size of the company and its financial resources when selecting the plan
• Evaluate the company’s objectives and the potential value of each plan to the company
• Make sure the plan is suitable for the company’s tax position
• Check the legal requirements and regulations that may be applicable

Once you have identified and evaluated the different types of plans and taken into consideration the company’s objectives, financial resources, tax position and legal requirements, you can move on to the next step.

Evaluating the company’s financial and operational situation

• Gather relevant financial information, such as the company’s financial statements and any relevant industry data
• Analyse the financial health of the company, including its current and projected cash flow, liquidity, profits, and debt
• Consider the company’s operational performance, including its products, services, and technology
• Evaluate the company’s workforce and talent pool
• Research the competitive landscape to identify the company’s competitive advantages and disadvantages
• Review the competitive environment to assess the external threats and opportunities

Once the financial and operational situation has been evaluated, you can move on to the next step: considering the objectives of the plan and the associated risks.

Considering the objectives of the plan and the associated risks

• Identify the objectives of the plan and the associated risks and consider how they might impact the plan.
• Establish a clear understanding of the motivations behind the plan, including the organisation’s desired outcomes.
• Analyse the potential risks associated with the plan and how these might be mitigated.
• Consider the potential legal implications of the plan and the associated risks.
• Consider the potential tax implications of the plan and the associated risks.

How you’ll know when you can check this off your list and move on to the next step: Once you have considered the objectives of the plan and the associated risks, you can move on to the next step of establishing the rules and regulations for the plan.

Establishing the rules and regulations for the plan

• Develop a set of rules and regulations that is tailored to the company’s needs and goals
• Review the rules and regulations with a legal or tax advisor to ensure compliance with applicable laws and regulations
• Create an agreement or plan document that outlines the rules and regulations of the plan
• Outline the specific details of the plan, such as the type of shares, the number of shares, and the eligibility requirements
• Set the vesting period, the exercise period, and the expiration period of the plan
• Determine the tax withholding and reporting obligations of the plan
• When the rules and regulations of the plan have been established and reviewed, you can move on to the next step of defining the rights and obligations of the participants.

Defining the rights and obligations of the participants

• Draft a formal document outlining the rights and obligations of the plan participants
• This document should also contain a description of the benefits and obligations of the plan
• It should also include the requirements of the plan in regards to taxation and reporting
• Make sure the document is compliant with the UK’s share incentive plan regulations
• Make sure the document is approved by the company’s legal team before adopting it
• When the document is finalized and approved, you can move on to the next step of specifying the time period for the plan.

Specifying the time period for the plan

• Consider the period of time that the plan should cover, such as one year, two years, or longer
• Decide how long participants will be able to access and benefit from the Share Incentive Plan
• Set any deadlines or restrictions related to the start and end dates of the plan
• When the plan is done, review the plan to make sure it reflects the chosen time period
• Check off this step when the time period for the plan has been specified and agreed upon.

Establishing the conditions for eligibility, such as minimum tenure or performance criteria

• Determine the criteria for eligibility for the plan, such as minimum length of service or performance metrics
• Include in the plan information about how the eligibility criteria will be monitored and reviewed
• Decide if there are any conditions or restrictions that should be imposed on those who are eligible for the plan
• Set up a system to ensure the eligibility criteria are tracked and reported on regularly
• Make sure that the eligibility criteria are clear and communicated to all participants
• When all the criteria are established, you can move on to the next step: Establishing the terms and conditions of the plan.

Establishing the terms and conditions of the plan

• Determine the maximum number of shares an employee can be granted
• Set the terms of the vesting period (how long it will take for the employee to be able to exercise the option to purchase the shares)
• Establish the conditions for the cancellation of the option to purchase the shares
• Specify the conditions for reappointment of the option
• Create rules regarding repurchase rights and restrictions
• Define the treatment of dividends and other distributions
• Decide if the shares will be subject to forfeiture
• Outline the taxation implications
• Set the terms of exit, if applicable

You will know you can move on to the next step when all the terms and conditions of the plan have been established.

Defining the types of shares to be offered

• Research different types of shares available to be offered under the plan such as free shares, matching shares and performance shares
• Decide on the type of shares to be offered, taking into account the objectives of the plan, the company’s financial situation and the preferences of the participants
• Notify the relevant authorities, such as HMRC and Companies House, of the proposed share scheme
• You can check this off your list when you have decided on the type of share to be offered and notified the relevant authorities.

Setting the vesting periods and restrictions

• Decide the length of the vesting period for the shares offered, i.e. the amount of time an employee must remain employed with the company to be eligible for full ownership of their shares
• Choose any applicable restrictions, such as a minimum length of service, or a specific performance target that must be met for the shares to vest
• Outline the conditions under which the shares would become forfeited or reclaimed by the company
• Make sure that the vesting period and restrictions are compliant with HMRC and UK employment law
• Once the vesting periods and restrictions have been set, you can move on to choosing the appropriate payment scheme.

Choosing the appropriate payment scheme

• Outline the purpose of the payment scheme
• Research the various options available to you and your company
• Consider the tax implications of each option
• Consider the company’s financial situation
• Consider the company’s budget
• Narrow down the options to the most appropriate one
• Consult with a financial advisor and/or lawyer to ensure the scheme is legal and compliant with taxation requirements
• When you have chosen the scheme and it has been approved by a financial advisor/lawyer, you can check this off your list and move on to the next step.

Evaluating the different options available

• Consider the different types of share incentive plan available in the UK, such as Share Option Plans, Enterprise Management Incentives, and Save As You Earn schemes
• Think about how the plan will be tailored to the goals of the company, and what benefits it will bring to the employees
• Research and obtain advice on the different types of plans and their suitability for the business
• Gather information and statistics on the performance of similar plans in other companies
• Consider the costs associated with setting up and administering the plan, such as legal fees, tax advice, and accounting costs
• When you have made your decision on the type of plan to use, you can check this off your list and move on to the next step.

Considering the tax implications for the employees and the company

• Research the tax implications for the employees and the company regarding any share incentive plan in the UK.
• Contact HRMC or a tax advisor if needed, to understand the specific tax implications and any legal requirements for the plan.
• Create a document that outlines the tax implications for the employees and the company.
• Once the tax implications for the employees and the company have been established, the step can be marked off and the next step can be completed.

Establishing the tax implications for the employees and the company

• Identify and assess the UK tax rules that apply to the share incentive plan
• Assess any changes to the UK tax rules that are relevant to the share incentive plan
• Identify any potential tax implications on both the employees and the company as a result of the plan
• Calculate the tax liabilities that the company and employees may incur
• When you have established the tax implications and liabilities for the company and employees, you can check this step off your list and move on to the next step.

Determining the applicable tax rates

• Researching the applicable tax rates for the Share Incentive Plan in the UK
• Consulting with a tax professional to ensure compliance with all applicable laws and regulations
• Calculating the total tax liability for the Share Incentive Plan
• Determining how the applicable tax rates will affect the company and the employees

You can check this off your list and move on to the next step once you have identified the applicable tax rates and calculated the total tax liability for the Share Incentive Plan.

Establishing the appropriate withholding tax

• Consult with the HMRC to determine the appropriate withholding tax based on the type of plan and the country of residence of the participant
• Determine the rate of withholding tax based on the type of benefit provided and the country of residence of the participant
• Take into account any applicable reliefs or exemptions available to reduce the withholding tax
• Establish the procedures for calculating and remitting the withholding tax to the HMRC
• When all of the above steps have been completed, you can move on to setting up a system for monitoring the plan and its performance.

Setting up a system for monitoring the plan and its performance

• Create a methodology for tracking and recording the performance of the plan
• Establish a timeline for regularly monitoring the plan and its performance
• Identify key performance indicators that you will use to measure the success of the plan
• Determine how the performance of the plan will be reported to shareholders and other stakeholders
• Once you have established the system for monitoring the plan and its performance you can check off this step as complete and move on to the next.

Setting up a record-keeping system

• Identify the type of records to be kept, such as employee address and contact details, share awards, and any other records related to the plan
• Decide on what format the records should be kept in, such as paper, electronic, or a combination of both
• Allocate responsibility for maintaining the records and ensure that they are regularly updated
• Ensure that the records are stored securely and confidentially
• When the records are set up, this step is completed and you can move on to the next step: Establishing a system for tracking employee participation.

Establishing a system for tracking employee participation

• Identify which employee performance metrics you will use to determine eligibility for the Share Incentive Plan
• Choose a tracking system, such as a spreadsheet or software, to record employee progress towards eligibility for the plan
• Ensure all employees are aware of the tracking system and understand how it works
• Update the tracking system regularly to accurately reflect employee performance
• When the tracking system is in place and operational, you can check this step off your list and move on to establishing a system for communication between employees and employers.

Establishing a system for communication between employees and employers

• Determine the best way to communicate between employees and employers. Options include emails, company newsletters, or an internal site or app.
• Establish a feedback system in the chosen communication method.
• Create a system that allows employers to monitor employee feedback on the incentive plan.
• Set up a system to allow employees to submit questions or concerns about the incentive plan.
• Establish a timeline for communication between employees and employers.
• Communicate the communication plans to employees and employers.

When you can check this off your list and move on to the next step:

• When the communication system has been established, the feedback system has been set up, and the timeline for communication has been established.

Developing a communication plan

• Outline the communication plan and its purpose
• Decide on the methods of communication that will be used to inform employees of their rights and obligations
• Create a timeline for when and how communication will occur
• Designate an individual or team to ensure the plan is properly implemented
• Create and distribute a communication plan outlining the rights, obligations and procedures for employees

Once the communication plan has been outlined, decided upon, created, distributed and implemented, you will have completed this step and can move on to the next step of ensuring that employees are informed of their rights and obligations.

Ensuring employees are informed of their rights and obligations

• Ensure that employees are aware of the Share Incentive Plan’s rules, performance criteria and other obligations.
• Develop clear and concise communication material for employees to review, such as a guidebook or fact sheets.
• Ensure employees understand the tax implications of their participation in the plan.
• Provide regular training to ensure that employees are aware of the plan’s rules and obligations.
• Hold regular meetings with employees to answer questions and provide updates on the plan.

How you’ll know when this step is complete:

• All employees have been informed of their rights and obligations related to the plan.
• Training materials and fact sheets have been distributed to employees.
• Employees have been trained on the plan’s rules and obligations.

FAQ:

Q: How does the UK’s taxation system work for share incentive plans?

Asked by Rebecca on August 9th 2022.
A: The taxation system for share incentive plans in the UK is highly complex and depends on a number of factors, including the type of company, the nature of the shares, and the circumstances of the employee. Generally speaking, any income or benefits received from a share incentive plan will be subject to income tax and national insurance contributions. Capital gains tax may also be payable when shares are sold. It’s important to consult a qualified tax adviser to understand the full implications of a share incentive plan.

Q: What is the difference between a UK share incentive plan and an Employee Share Scheme (ESS)?

Asked by George on October 1st 2022.
A: A UK share incentive plan (SIP) is an HMRC-approved scheme that allows companies to give employees free shares, or to purchase them at a reduced rate. An employee share scheme (ESS) is a more generic term used to describe any scheme that allows employees to purchase or receive shares in the company, but does not necessarily have HMRC approval. Both can provide benefits to employees, but SIPs tend to have more favourable tax treatment and are therefore more attractive for employers.

Q: What other types of benefits can be included in a share incentive plan?

Asked by Emma on December 12th 2022.
A: In addition to offering free or discounted shares, a share incentive plan can also include other types of benefits, such as bonuses and options. Bonuses can be offered as one-off payments or regular payments, while options allow employees to purchase shares at a future date at a pre-agreed price. These types of benefits can be used to incentivise and reward employees without having to issue additional shares.

Q: How do I structure my share incentive plan according to UK law?

Asked by James on January 17th 2022.
A: When designing a share incentive plan in accordance with UK law, there are certain rules and regulations that need to be followed. The HMRC provides detailed guidance on how SIPs should be structured, including the types of shares that can be included in the plan, who can participate in it, and what types of benefits can be provided. It’s important that you understand these rules before designing your own SIP, as failure to comply with them could result in penalties and other consequences.

Q: What happens if I want to terminate an employee’s participation in my company’s share incentive plan?

Asked by Jesse on February 28th 2022.
A: If you wish to terminate an employee’s participation in your company’s share incentive plan, you must do so in accordance with the terms of the plan and any applicable laws or regulations. Depending on the type of plan you have set up, you may need to provide notice or make arrangements for any outstanding shares or benefits to be returned or transferred before terminating their participation. It is important that you carefully consider both your legal obligations and contractual obligations before taking any action with regards to terminating an employee’s participation in your SIP.

Q: Are there any restrictions as to who I can include in my company’s share incentive plan?

Asked by Elizabeth on April 15th 2022.
A: Yes; certain restrictions apply when it comes to who can participate in a company’s share incentive plan. Generally speaking, only employees of the company are eligible for inclusion in SIPs; this includes directors and shareholders who are also employed by the company. However, some plans may allow external consultants or contractors to participate as well - this will depend on the specific terms of your SIP agreement and any applicable laws or regulations. It’s important that you check all relevant legislation before including any individuals outside of your core team in your SIP.

Q: Can I use my company’s existing ESS as part of a UK share incentive plan?

Asked by Michael on June 2nd 2022.
A: Yes; provided it meets all relevant legal requirements, your existing Employee Share Scheme (ESS) could form part of a UK Share Incentive Plan (SIP). However, if you are wanting to take advantage of any tax advantages associated with SIPs then it is important that you ensure that all aspects of your ESS comply with HMRC guidelines before incorporating it into your SIP agreement. Additionally, some elements of ESSs may not be eligible for inclusion within SIPs; for example, options cannot generally form part of an HMRC-approved SIP agreement so would need to be structured separately from your SIP if they were included within it.

Q: What data will I need to provide when setting up my company’s share incentive plan?

Asked by Daniel on July 21st 2022.
A: When setting up your company’s share incentive plan (SIP), you will need to provide HMRC with detailed information about its structure and operation including details such as how many shares will be issued under the scheme; whether employees will receive free shares; what type of benefit they will receive; who is eligible for inclusion; how much each individual’s benefit will be worth; how much each individual has contributed towards their benefit; and how long the scheme will operate for. You may also need to provide additional information depending on which type of SIP you are setting up – for example trust-based SIPs require more detailed information about how trust funds will operate than other types do – so it’s important that you consult with experienced professionals before setting up your own scheme.

Q: What happens if I want to make changes to my existing share incentive plan?

Asked by Sarah on September 10th 2022.
A: If you wish to make changes or amendments to an existing UK Share Incentive Plan (SIP), then you must do so in accordance with HMRC guidelines and regulations as well as any other applicable laws or regulations pertaining specifically to your business or industry sector. This includes making sure that changes made do not adversely affect existing participants’ rights or entitlements – such changes could potentially have serious legal implications so must always be considered carefully before implementing them. Additionally, if there are changes which affect taxation then these must be reported directly to HMRC within specified timescales - failure to do so could result in penalties being issued against both you and your employees so it’s always best practice ensure your SIP is kept up-to-date with all relevant legislation at all times via regular reviews and/or audits if necessary

Example dispute

Share Incentive Plan Lawsuits

• A plaintiff may raise a lawsuit referencing a share incentive plan if they believe that their rights as an employee have been infringed upon.
• The lawsuit may cite violations of securities laws and regulations, including breaches of fiduciary duty and/or fraud.
• The plaintiff may also allege that the company has failed to provide adequate disclosure of the plan, or that the plan was structured in a manner that was not in the best interest of employees.
• The lawsuit may seek compensation for any losses resulting from the alleged violations.
• The plaintiff may also seek punitive damages and/or injunctive relief if the violation is deemed to be intentional.
• A plaintiff may be able to win their lawsuit if they can show that their rights as an employee were violated and that they suffered a financial loss as a result.

Templates available (free to use)

Free Share Agreement For Tax Advantaged Share Incentive Plan
Instruction From Participant To Trustee On Rights Issue Regarding Share Incentive Plan
Rights Issue Explanation Letter To Share Incentive Plan Participants Inviting Action
Schedule 2 Share Incentive Plan Rules
Trust Deed For Tax Advantaged Share Incentive Plan

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