What is an LTIP?
A Long-Term Incentive Plan (LTIP) is a reward system that companies use to incentivise key employees by offering them shares in the company, typically with vesting schedules. These plans are designed to align your interests with the company’s long-term growth and encourage high performance over several years.
LTIPs are commonly offered by larger companies, such as FTSE-listed firms or multinational corporations, that have executive compensation packages designed to retain top talent and drive long-term success.
How LTIPs are taxed?
The value of the shares at the time of vesting is subject to income tax and National Insurance contributions, just like any other form of salary or cash bonuses. However, once the shares are vested, they become your property. If you choose to sell the shares, any profit made on the difference between the sale price and the vesting price will be subject to Capital Gains Tax (CGT).
Capital Gains Tax applies only applies when you sell the shares, not when they vest. You also have a small Capital Gains Tax allowance of £3,000 – if your gain is less than this when you sell the shares, you won’t pay any Capital Gains Tax.
If you are a higher rate tax payer your will pay 24% on the gain (i.e the difference in value between the sale price and vesting price). If you are a basic rate tax payer, you’ll pay 18% on the gain.
Example of LTIP taxation
Here’s a simple example of how LTIP tax is calculated. Let’s consider the following assumptions:
- Salary: £250,000
- LTIP Award: 50,000 shares
- Company Share Price at Vesting: £10 per share
- Total value of shares at vesting : £500,000
- Share Price Increase after 2 Years: 10%.
LTIP tax explained: watch the video
Watch this short video for a simple walkthrough of how LTIPs are taxed at vesting and on sale, plus a few practical planning tips. When you’re ready, try the calculator to model your figures.
LTIP calculator
Try the numbers for yourself. Pop your salary, the size of your LTIP award, the share price at vesting and the price you think you might sell at into the calculator below. In seconds it will show the income tax and National Insurance due at vesting, any Capital Gains Tax when you sell, and most importantly, what lands in your pocket at each stage.
The results are for illustration only, but they’ll give you a clear starting point before you sit down with us to fine-tune your plan.
Estimate your LTIP tax
Stage 1: Income Tax and National Insurance before the LTIP award (Salary Only)
In this scenario, we calculate the income tax and National Insurance (NI) based on the salary of £250,000.
| Income | Salary |
|---|---|
| Amount (£) | £250,000 |
| Tax (£) | £93,675 |
| National Insurance (£) | £8,770 |
| Total Tax & NI (£) | £102,445 |
| Net Income (£) | £147,555 |
Stage 2: Income Tax and National Insurance after the LTIP Award (Salary + LTIP)
In this scenario, we calculate the income tax and National Insurance (NI) based on salary and the £500,000 LTIP award.
| Category | Details |
|---|---|
| Amount (£) | £750,000 (£250,000 salary + £500,000 LTIP) |
| Tax (£) | £318,675 |
| National Insurance (£) | £18,518 |
| Total Tax & NI (£) | £337,193 |
| Net Income (£) | £412,806 |
Stage 3: Selling the shares after 2 years (Capital Gains Tax)
Now, let’s assume the LTIP shares increase in value by 10% over the two years. The share price increases from £10 to £11 per share.
| Details | |
|---|---|
| LTIP shares increase in value | 10% (from £10 to £11 per share) |
| Sale Price | £550,000 (10% increase in share price) |
| Capital Gain | £50,000 |
| Minus CGT allowance | £47,000 (£50,000 – £3,000) |
| Capital Gains Tax (CGT) | 24% |
| CGT Due | £11,280 |
| Net income from share sale | £535,720 |
Managing risk: Diversification
While it’s tempting to hold on to the shares you’ve earned, there’s a significant risk in keeping too much of your wealth tied up in your employer’s shares. A large portion of your wealth being tied to a single company means you’re vulnerable to company-specific risks, such as market volatility or changes in leadership.
If your company suffered a downturn in fortunes, then your job and personal wealth are at risk. Of course, the reverse could be true: your company could continue to flourish, potentially growing your income and personal wealth! Neither outcome is certain so it comes down to your personal circumstances and appetite for risk.
It’s generally advisable to diversify your investments to spread risk and ensure a more balanced portfolio. Diversification can include selling some of your vested shares and reinvesting the proceeds into a variety of assets, such as global equities (i.e. the shares of other companies around the world), bonds, or cash. This helps you manage risk and grow your wealth more securely.
Saving and investment options
Once your LTIP vests, there are several ways you could use the funds effectively:
- Retirement savings
Consider contributing to tax-efficient retirement accounts such as pensions or ISAs, which can help reduce your tax liability and provide long-term growth. - Diversified portfolio
Build a portfolio with a mix of asset classes (stocks, bonds, property), spread across the world. This helps to protect yourself from the risk of holding too much company stock. - Emergency fund
Use some of the proceeds to establish or boost an emergency savings fund, ensuring financial security if unexpected expenses arise.
How Abode Financial Planning in Cirencester can help with your LTIP
At Abode Financial Planning, we have extensive experience helping clients who hold Long-Term Incentive Plans (LTIPs). Many of our clients are in similar positions, with substantial LTIP awards that play a key role in their overall financial strategy.
We understand the complexities involved, from managing the tax implications to integrating these awards into your broader financial plan.
Our team works closely with you to build a personalised plan that maximises the benefits of your LTIPs while carefully managing risk. Whether it’s providing guidance on diversifying your investments, providing pension advice, optimising your tax strategy, or planning for retirement, we are here to ensure that your LTIPs support your long-term financial goals.
With our expertise, we can help you navigate the nuances of your LTIP and integrate it seamlessly into your comprehensive financial planning strategy.
Ready to make the most of your LTIP? Contact us today for expert financial advice tailored to your goals.
Frequently asked questions
What does LTIP stand for?
LTIP stands for Long-Term Incentive Plan. It’s a reward system used by companies to incentivise employees by offering them shares, typically based on performance over several years. The goal is to align employees’ interests with the company’s long-term growth.
How does LTIP work?
An LTIP works by granting employees shares in the company, which vest over time, typically based on achieving performance targets or staying with the company for a set period. Once vested, employees can sell the shares, often benefiting from any increase in value.
How are LTIPs taxed?
LTIPs are taxed at two stages:
1. **Income Tax**: When the shares vest, their value is subject to income tax and National Insurance, just like a salary.
2. **Capital Gains Tax (CGT)**: If you sell the shares later, any gain made is subject to CGT. The rate depends on your income tax bracket—24% for higher rate taxpayers and 18% for basic rate taxpayers.
Should I sell my LTIP shares right away?
Whether you should sell your LTIP shares immediately depends on your personal financial situation and risk appetite. Selling right away could help you diversify your investments and reduce risk. However, holding onto the shares may offer potential for future growth, depending on the company’s performance. It’s best to consult a financial planner to determine the right strategy.
What are the benefits of an LTIP?
The main benefit of an LTIP is that it aligns employees’ interests with the company’s long-term success by offering shares as a reward. LTIPs incentivise employees to stay with the company, perform well, and drive its growth. Additionally, LTIPs provide potential tax advantages compared to other forms of compensation, as they are taxed on vesting and when sold, not as part of regular income.
What happens if I leave the company before my LTIP vests?
If you leave the company before your LTIP vests, you may lose the right to the unvested shares, depending on the terms of the plan. Some plans allow for pro-rated awards or continued vesting if you leave for certain reasons, such as retirement or redundancy. It’s important to review your LTIP agreement or speak to your HR department for clarity on this.
How can I calculate my LTIP value?
To calculate your LTIP value, you need to know the number of shares awarded, the share price at vesting, and any applicable taxes. The value is the share price at vesting multiplied by the number of shares you’ve earned. Keep in mind that taxes, including income tax and Capital Gains Tax, may reduce the amount you receive from the sale of your shares.
Can LTIPs be transferred or sold?
In most cases, LTIPs can be sold after they vest, but they are not typically transferable until they are fully vested. Some companies may have restrictions on when or how you can sell the shares, such as during a blackout period or as part of a lock-in agreement. Always check the terms of your LTIP for any limitations.
Can I use my LTIP for retirement planning?
Yes, LTIPs can play a significant role in retirement planning. Once your shares vest, you can sell them and invest the proceeds into tax-efficient retirement accounts, such as pensions or ISAs. By doing so, you can boost your retirement savings while benefiting from tax reliefs and capital growth. Consult a financial planner to ensure you’re optimising the use of your LTIP for retirement.
Investment risk information
Please note, the value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
This information is for general information only and does not constitute advice. The information is aimed at retail clients only.
Past performance is not necessarily a guide to future performance.
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