What does section 490 of the Income Tax (Earnings and Pensions) Act 2003 do?

Section 490 establishes that employees are not liable to income tax when they receive shares under an approved Share Incentive Plan. It applies to free shares, matching shares, partnership shares and dividend shares. The exemption applies at the point of award or acquisition, making the initial receipt of SIP shares entirely tax-free regardless of their value at that time.

Which types of Share Incentive Plan shares are covered by the section 490 income tax exemption?

The income tax exemption under section 490 covers all four types of SIP shares: free shares awarded by the employer, matching shares given to match employee purchases, partnership shares bought through salary deductions, and dividend shares acquired when dividends on existing plan shares are reinvested to purchase additional shares on the employee's behalf.

Would an employee normally pay income tax on shares received from their employer outside a SIP?

Yes. Outside of a tax-advantaged plan such as a Share Incentive Plan, an award of free or discounted shares by an employer to an employee would normally be treated as employment income and taxed accordingly. Section 490 disapplies that treatment for shares properly awarded under a SIP, providing a significant benefit to participating employees.

Can you give an example of how section 490 works in practice for an employee?

If an employee receives £3,600 of free shares, buys £1,800 of partnership shares via salary deductions, receives £1,800 of matching shares and has £200 of dividend shares acquired on their behalf, section 490 means no income tax is payable on any of these shares at the point they are awarded or acquired under the Share Incentive Plan.

Income Tax (Earnings and Pensions) Act 2003 section 490

No charge on award or acquisition of shares: general

Section 490 establishes that employees are not liable to income tax when they receive shares under an approved Share Incentive Plan (SIP).

The section applies when an employee is awarded free, matching or partnership shares under the plan, or when dividend shares are acquired on their behalf.
At the point of award or acquisition, the employee pays no income tax on the value of the beneficial interest in the shares that passes to them.
This is the fundamental tax advantage of a Share Incentive Plan — the initial receipt of shares is entirely free of income tax.
The exemption covers all four types of SIP shares: free shares, matching shares, partnership shares and dividend shares.

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