What is a share incentive plan?
Answered 17 March 2026
A Share Incentive Plan (SIP) is a tax-advantaged, all-employee share scheme governed by Schedule 2 to the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). Here is a summary of what the law says and how HMRC describes it in practice:
What the law says
A Share Incentive Plan is defined as a tax-advantaged all-employee share award scheme meeting the requirements of Schedule 2, ITEPA 2003. The legislative framework for SIPs forms part of the "SIP code" under section 488 of ITEPA 2003.
A qualifying SIP must be established as a trust, through which shares are held on behalf of employees. The plan can provide for four types of shares:
- Free shares – provided to employees at no cost
- Partnership shares – purchased by employees through pre-tax salary deductions
- Matching shares – awarded by the employer to match partnership shares (up to two matching shares per partnership share)
- Dividend shares – acquired by reinvesting dividends on plan shares
HMRC guidance / practice
HMRC describes the purpose of a SIP as benefiting employees through shares that give them a continuing stake in the company. The plan is designed to be flexible and to encourage wide employee share ownership, and it may not give preferential treatment to directors or more highly remunerated employees.
Key tax advantages include:
- No Income Tax when plan shares are awarded to or acquired on behalf of an employee
- No further Income Tax liability if shares are kept within the plan for 5 or more years
- No Capital Gains Tax if the employee retains shares within the plan until the trustees dispose of them on their behalf
- No Inheritance Tax on property held in a SIP trust (by virtue of IHTA 1984, s.86(3)(c)), and transfers from a close company to a SIP are not chargeable to IHT
For corporation tax, the sponsoring company can obtain relief under CTA 2009, Part 11 for the costs of setting up the scheme, running costs, and contributions into the plan.
In summary, a SIP is a statutory, trust-based, all-employee share ownership scheme that allows companies to provide shares to employees in a tax-efficient manner, subject to the conditions set out in Schedule 2 to ITEPA 2003.
Citation sources
The purpose of a Share Incentive Plan (SIP) is to benefit employees of a company through shares which give them a continuing stake in that company. The Share Incentive Plan is very flexible and intended to encourage wide employee share ownership. The plan may not give preferential treatment to directors or to more highly remunerated employees. Under the plan, subject to certain statutory constraints and limits, a company may each year: provide employees with ‘free shares’ give employees the chan
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FA2000 extended exemption from Inheritance Tax (parallel to the exemption for approved profit sharing schemes (IHTM42940)) to employee share ownership plans approved under FA2000/Sch8. These were replaced by share incentive plans under ITEPA2003/Sch 2 and these automatically satisfy IHTA84/S86 by virtue of IHTA84/S86(3)(c) so property held in a share incentive plan is not subject to the relevant property charges that would otherwise apply to property of a discretionary trust. Transfers from a
The Corporation Tax rules contain special rules which provide relief in respect of employee share schemes. There are different rules for Share Incentive Plans (SIPs) and other employee share schemes. For Share Incentive Plans (SIPs) companies will typically obtain relief under CTA09/PT11 for the costs of setting up the scheme, the running costs of the scheme and the cost of making contributions into the plan. For other employee share schemes companies will typically obtain relief under CTA09/PT1