ACCA Advanced Taxation (ATX) Practice Exam

In a SIP, how are dividend shares treated regarding Income Tax and National Insurance Contributions (NIC)?

1. No taxes are payable on dividend shares

2. Only NIC is payable

3. Only Income Tax is payable

4. Both IT and NIC must be paid

The correct answer is: No taxes are payable on dividend shares

In a Share Incentive Plan (SIP), dividend shares are treated favorably for tax purposes. When dividends are paid on shares held within a SIP, they are not subject to Income Tax or National Insurance Contributions (NIC) at the time they are received. This is part of the incentive structure designed to encourage employee ownership and benefit from the rewards of company performance without immediate tax liabilities preventing participation. Typically, SIPs allow employees to receive shares and reinvest dividends into additional shares, which can either help the employee build their stake in the company or increase the value of their investment over time. This tax treatment incentivizes long-term shareholder engagement and loyalty, as employees can accumulate additional shares without incurring tax on the dividends they receive within the SIP structure. In summary, the correct understanding is that under current guidelines, no taxes are payable on dividend shares in a SIP at the time they are received, making this option the most accurate in relation to the tax implications on dividend shares within this specific plan.