Save As You Earn Share Option Plan

Save As You Earn (SAYE) share option plans are tax-advantaged share option plans that allow employees at all levels to invest in their company’s shares in a tax efficient way. Employers can use SAYE option plans alongside their other employee share plans as tax-efficient way of encouraging wider employee ownership of the company’s shares.  

How it works

Employees are granted options that will permit them to acquire shares in the company after three or five years. The price at which options are granted over company shares can be discounted by up to 20% of the market value of the shares at the date of grant. 

The SAYE plan must be operated on an ‘all-employee’ basis. Each employee must enter into a savings arrangement for the same period as the length of the option: monthly savings are made from post-tax salary. 

On exercising the option, the accumulated savings are used to fund the exercise price of the option to acquire shares. The employee is not obliged to exercise the option so, alternatively, can simply withdraw their savings and the option will lapse. When an option is exercised, the shares are acquired free of income tax and National Insurance Contributions (NIC). 

Employee advantages

There is no risk to employees as they can choose whether to exercise their option or take the cash at the end of the savings period. Any share price discount offered locks in an immediate potential benefit, irrespective of future share price growth.

The employee can make monthly savings of between £5 and £500 (although the company can set limits on the levels of savings according to remuneration or length of service). Employees can, therefore, choose to save according to their personal circumstances.

While there is no income tax or employee’s NIC when the employee receives the shares, on the sale of the shares, the difference between the market value of the shares on sale and the exercise price is potentially liable to Capital Gains Tax (CGT). Of course, in many cases, the individual’s CGT annual exemption along (or other reliefs) may be available to reduce or exempt the gain made. 

Example

On 1 June 2020, an employer invites all eligible employees to apply for the grant of options, conditional on taking out a linked savings arrangement. An employee does so, saving £250 per month for three years. The share options are granted at 80p per share, being a 20% discount on the agreed market value of £1 per share. 

After three years, the employee has saved £9,000*. The share price is now £1.60. The employee exercises his options over 11,250 shares and sells them all.

Option exercise            No tax or NIC is payable.

On disposal of the shares:
Sale proceeds:                                       £18,000
Less: base cost (i.e. exercise price)      (£9,000)
Chargeable gain:                                    £9,000

The employee makes a profit of £9,000 entirely free of income tax and NIC and, because the employee has made no other capital gain in the tax year, there is CGT of just £300 to pay (£600 for higher rate taxpayers) after the £6,000 CGT annual exemption.

*Since SAYE bonus rates are currently at 0%, the bonus is excluded from this figure. However, when rates rise again, there would potentially also be a bonus added. 

However, employees can transfer up to £20,000 per annum of SAYE shares into a stocks and shares individual savings Account. The employee’s ISA must agree to the transfer and the transfer must take place within 90 days of the date of the exercise of their SAYE option. The value of the shares transferred will count towards the employee’s personal £20,000 ISA investment limit for that year. Shares held in an ISA can be sold free of CGT, so in many cases, this would be the most tax-efficient route for SAYE investors.

Employer advantages

No employer’s NIC will be due on the exercise of the options. In addition, the company may be able to claim a corporation tax deduction under statutory rules for the amount of option gains realised by its employees together with a deduction for the costs of setting up the plan.

Companies have great flexibility to decide on the level of discount given – from zero to 20% of the market value of the shares. Companies can also set a minimum service requirement for participants that can be set at a maximum of five years. Therefore, employers can choose to exclude temporary and short-term workers. 

Administration of SAYE plans is carried out by the savings provider rather than the company. However, the company will still be required to complete annual reporting to HMRC.

Requirements

The following conditions must be met by the company and its shares:

• The shares must be ordinary shares, fully paid up and non-redeemable
• The company must self-certify to HMRC that the SAYE Plan meets the statutory requirements
• The SAYE Plan must be offered to all employees with five years’ service or more and may be offered to employees with less service.