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Long-term incentive plans

One common example is the award of shares under a long-term incentive plan (LTIP) or performance share plan. Under these plans, employees receive contingent awards of shares ― either via a share option or a restricted share award ― and where demanding performance targets are met, often after a three-year measurement period, the shares are awarded at no cost to the employee. This type of arrangement is commonly used by listed companies but may be used by any company.

However, for an unlisted company, consideration should be given to how the income tax and NIC costs will be funded by the employee if there is no market for the shares. This is known as a ‘dry tax charge’, see Simon’s Taxes C1.311 and C6.119 for discussion of ‘dry tax charges’ generally.

There are two significant issues in making a share award at nil cost: