We will break down all three clearly in this brief guide, including the SIP tax benefits available on each type, so you can make informed decisions whether you're an employee or an HR professional setting up a scheme.
What Are the Three SIP Share Types?
A Share Incentive Plan is a government-approved employee share scheme that UK employers can offer to help staff buy or receive shares in their own company tax-efficiently.
Free shares are given by the employer at no cost to the employee, up to £3,600 per year. Partnership shares are bought by the employee directly from gross salary, meaning before income tax relief on shares and National Insurance is deducted. SIP matching shares are bonus shares the employer awards when an employee buys partnership shares, offered at a ratio chosen by the employer (up to 2 matching shares for every 1 partnership share purchased).
All three types can be held in a SIP trust and may become fully tax-free if held for five years.
What Are Free Shares in a SIP?
Free shares SIP allowance, the name says it all. These are shares your employer awards to you without any cost on your part. Under current HMRC rules, employers can award up to £3,600 worth of free shares per employee per tax year.
Employers have quite a bit of flexibility in how they structure this. They can either award the same number of shares to all employees or link the awards to individual or company performance.
Both approaches are allowed, as long as the scheme meets the requirements set by HM Revenue and Customs. Calculate how much your matching and free shares are worth.
Tax treatment of free shares
Free shares are not subject to income tax or National Insurance at the point they’re awarded, provided they sit in the SIP trust. The tax position depends on how long you hold them:
Held for less than 3 years: Income tax and National Insurance become payable on withdrawal.
Held for 3 to 5 years: Tax is charged on the lower of the original award value or the current market value.
Held for 5 years or more: Completely free from income tax and National Insurance.
If you keep your shares in the plan for the long term and sell them later instead of withdrawing early, any profit (gain) made after SIP tax benefits may be subject to Capital Gains Tax.
However, your annual Capital Gains Tax allowance may apply, which means a portion of the gain could be tax-free.
What Are Partnership Shares in a SIP?
Partnership Shares SIP is the portion you buy yourself from your salary, but the purchase is made using pre-tax income, meaning Income Tax and National Insurance are deducted before the money is used. This reduces your effective cost immediately.
The usual limit is £1,800 per tax year or 10% of your salary (whichever is lower). If your annual salary is below £18,000, then your limit is restricted to 10% of your salary rather than the full £1,800. It's important to understand the rules around when you can sell them.
How the payroll deduction works
Suppose you earn £40,000 and you're a basic rate taxpayer. If you invest £1,800 in partnership shares:
- You save 20% income tax: £360
- You save National Insurance contributions (currently 8% for most employees): £144
- Your effective out-of-pocket cost is closer to £1,296 for £1,800 worth of shares
For higher-rate taxpayers, the savings are even greater.
Your employers can also set up an “accumulation period” during which deductions are taken from your salary and then used to buy shares in one go (usually in batches). This period can last up to a maximum of 12 months.
The exact structure can vary from one SIP to another, so it’s important to check your specific plan rules to clearly understand the timing and purchase process.
You can use the free SIP Calculator to see exactly what your partnership share contributions could cost after tax relief, based on your own salary and tax rate.
How Do SIP Matching Shares Work?
Matching shares are often one of the most valuable parts of a SIP, especially when an employer offers a generous ratio but they are also commonly misunderstood.
When you buy partnership shares, your employer may award additional matching shares. The maximum rule allows up to 2 matching shares for every 1 partnership share, meaning if you buy 100 shares, you could potentially receive 200 extra shares.
However, not all employers offer matching shares. It is entirely at the employer’s discretion, and the ratio can vary typically anywhere from 1:1 up to 2:1.
Tax treatment of SIP matching shares
Like free shares, matching shares are not subject to income tax or National Insurance when awarded, provided they remain within the SIP trust. The same holding period rules apply:
Under 3 years: Full income tax and NI on withdrawal.
3 to 5 years: Tax on the lower of original or current market value.
5 years or more: No income tax or National Insurance.
If you leave your job, matching shares are usually forfeited if you haven’t held them for the required period within the plan.
That’s why it’s important to carefully check your specific SIP rules, so you know exactly how long you need to hold the shares to keep them.
SIP Tax Benefits: Why the Holding Period Matters
The maximum SIP tax benefit is achieved when shares are held in the plan for a full 5 years. If you keep them for this entire period, no Income Tax or National Insurance is charged on their value, no matter how much they have increased.
This is one of the few genuine tax advantages available to employees in the UK, and it applies not only to employer-provided shares (Free and Matching) but also to the shares you buy yourself (Partnership shares), under the rules set by HM Revenue and Customs.
To model your own figures, visit shareincentivesplancalculator.com and run your numbers based on your salary, tax band, and employer’s matching ratio.
Key Differences at a Glance
| Share Type | Who Provides It | Annual Limit | Tax Relief Available | Employer Required to Offer? |
|---|---|---|---|---|
| Free Shares | Employer | £3,600 | Yes — no income tax/NI if held 5 years | No |
| Partnership Shares | Employee (via payroll) | £1,800 or 10% of salary | Yes — contributions from gross pay | No |
| SIP Matching Shares | Employer | Up to 2 per partnership share | Yes — no income tax/NI if held 5 years | No |
Please verify current limits with HMRC or a qualified adviser, as annual allowances may be updated.
Frequently Asked Questions
Can I hold all three types of SIP shares at the same time?
Yes. If your employer’s plan includes all three components, you can receive all of three simultaneously within the same tax year. Each type operates independently, with its own allowance and holding period running in parallel.
What happens to my SIP matching shares if I leave my job?
Matching shares are usually subject to a forfeiture period set by the employer, commonly up to three years. If you leave before that period is up, you may lose your matching shares.
Is there a maximum total amount I can hold in a SIP?
HMRC sets limits on what can be awarded or purchased each tax year per share type, but there is no lifetime cap on the total value held within a SIP.
Do SIP shares count towards my ISA allowance?
No. Shares held within a SIP trust are separate from your ISA allowance.
Can my employer change the SIP matching shares ratio each year?
Yes, subject to the plan rules. Employers have flexibility to adjust the matching ratio from year to year, or to suspend the matching element if business circumstances change.