SIP question - selling before 5 years

YoungSaver20

Workplace SIP and selling before 3 years / 5 years
Hi wondering if anyone can help and has experience with share incentive plans and selling before 5 years.

I’m early in my career with the company and have been doing share save and SIP since late 2017. I don’t have any intention to sell the shares anytime soon but just if I do need the money - or feel I need to leave the company I’d like to know my options.

I just cannot seem to understand what happens when I sell before 5 years.

So an example:

So was looking at my wage from September 2017 - did full £600 - but only paid £415 as that was the difference between the September wage and August wage.
That gave me 312 partnership shares and in October 2020 I get another 312 shares for free (matched shares)

So when I try to sell those 312 shares now - it tells me 312 matched shares will be forfeited. Then I sell the 312 - it’s £517 (share price has gone down a bit since then) but I pay £15 commission then £10 NI and £224 income tax so I only get back £268

I know the share price has gone down and there is the commission fee but can’t understand why I get back a lot less than I initially paid.

So initially I saved myself approximately 30 % and got shares worth £600. However I now try to sell those same shares and I could half the value back after tax, ni and fees. Obviously the answer is to just don’t sell them whatever I do until October 2022 but sadly can’t guarantee I’ll still be working there by then.

Anyone able to explain the difference from when I bought the shares to selling before the 5 years?

YoungSaver20

—-I moved this thread from another board. However here is a reply I received and response I had to it.

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Originally Posted by tacpot12 View Post
You have explained in your post why you are getting back a lot less that you paid:

1) the share price has gone down
2) you have to pay dealing charges (commission) - this would be payable anytime you sold the shares
3) you have to pay NI and PAYE as you paid for the shares before NI and PAYE was deduced - the arrangement that allows you to buy the shares out of untaxed income requires you to keep the shares for five years.

If you leave, you can still keep the shares and avoid paying PAYE and NI. You just need to wait for them to go back up in value to see whether they were a good buy or not.


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I can appreciate all of your points. However I feel the amount I saved in income tax and nic is not reflected when selling the shares which is my question. I realise there is a £15 commission fee and the shares have lost value but even I work it out this way - £517 / £600 = 86 %
So if I did £283 / 0.86 = £329 so I’m still not getting my £415 I paid initially. If anyone is able to explain why the tax is so high (between 45 and 50 %)?

jobbingmusician

I have a vague idea that there may be special tax levels on SIPs??? It's only an impression, from a question on my self-assessment form which I never read properly because it excludes me quite early on, but I'm sure HMRC are interested in shares from employers, and it seems quite plausible to me that they might try and penalise you for leaving 'early'. Maybe a bit of a hunt on their site?

tacpot12

Have a look at the footnote on this page: https://www.gov.uk/tax-employee-share-schemes/share-incentive-plans-sips

ReadingTim

SIP shares are purchased from pre-tax income. Employees who keep their shares in the plan for five years pay no income tax, NICs or capital gains tax (CGT) on either the initial value or any subsequent increase in value of the shares up to the time they are taken out of the plan. If shares are taken out of the plan between three and five years, an employee pays income tax and NICs only on the market value of the shares when they were awarded (or, in the case of partnership shares, the amount of salary deducted) or the then market value of the shares at the date they are withdrawn, whichever is lower. If the shares are withdrawn from the plan before three years has passed, income tax and NICs are charged on the market value of the shares at that time.

The difference in value in the OPs example is therefore accounted for by income tax and NICs - in the same way as a salary of £30k doesn't mean you get £30k in your pocket every year. They didn't pay it when the acquired the shares, so they're paying it now.

YoungSaver20

Thanks for your response but I feel like something is missing. I don’t know how to explain it in a better way.

Basically I paid x for £600 shares (which gave me 312 shares in my employer)
If I wish to sell those 312 shares again - I’m not getting x back.

It’s not a simple case of I saved £185 in tax and ni and I’m just paying that £185 now that I’m selling the shares. - feel it’s more like I save £185 in ni and tax and if I were to sell now then I would pay £285 in ni and tax to sell the shares (almost £100 more)

Is anyone been in this situation before that can explain - just helpful to understand as I decided to do £150 a month.

ReadingTim

Tax, dealing costs, and share price movement (downwards) are the 3 variables. You say the share price has gone down "a bit" - how much exactly? This is probably what you are missing - the only other thing I can think of would be f/x if the shares aren't denominated in GBP...(which you don't mention, so probably isn't the case)

However, for a fully worked example, you should contact HR or whoever administers the scheme.

Generally speaking, a SIP is only really beneficial to higher rate taxpayers who stay in for the 5+ years. If you're basic rate, or not planning to be around that long, stick to a 3 year SAYE - you'll at least get your savings back, whereas SIPs are far more dependent on share price, meaning you can actually lose money on them.

somethingcorporate

Were you a standard rate tax payer when you bought them and a higher rate tax payer now?


All things being equal the tax position should be the same. You only get the tax benefit if you hold them for 5 years.

TELLIT01

The way the system is run may be company specific, but when I was made redundant from a company running a SIP scheme, I only go to keep full years of shares. As I left in January, I got my contributions from April onwards of the previous year refunded rather than the shares. That was some years ago so rules may have changed.