A HMRC Save as you Earn (SAYE) scheme is a tax advantaged scheme for all employees and directors

What does it do?

It allows participants to save up to £500 per month to acquire shares at the end of a 3 or 5 year period. Shares are acquired upon the exercise of an option that is funded from the proceeds of a special certified SAYE savings arrangement – Employees have money deducted from their salary and put into a special savings account.

Who is it for?

Most companies will qualify to operate a SAYE scheme. SAYE is an all employee plan and this means you must invite all employees to participate.

However, the company can specify that employees need to have worked for the company for a minimum period which can be set at up to five years. Employees decide whether they wish to accept the invitation to participate.

How does it work?

Under Approved SAYE schemes the company grants employees an option to use the proceeds of their SAYE Share Scheme, including tax-free bonuses, to purchase company shares when their savings contracts mature in either 3 or 5 years time.

Employees agree to save a given sum of money each month with a bank or building society for the 3 or 5 year period. The maximum amount that can be saved is £500 per month under an approved scheme. Employees will receive a tax free bonus after fixed periods of time. The bonus rates currently (November 2015) are:

  • The 3 year bonus is equal to 0.0 monthly contributions;
  • The 5 year bonus is equal to 0.0 monthly contributions;

The bonus rates in force when an employee enters the contract are included in the invitation document and apply for the entire contract period.

The rates of bonus are determined by HMRC and are linked to swap rates quoted in the Financial Times. As a comparison the bonus rates in September 2008 were 2.4 and 7.0 respectively for a 3 or 5 year savings contract.

Employees can exercise their option during the 6 months after the 3 or 5 year savings contract has been completed.

Let’s consider an example:

  • Today ABC Ltd decides to offer each of its employees a share option. This will allow employees, after a fixed period of time has passed, to buy a fixed number of shares at today’s share price of £1 per share or at a discount of up to 20% on that price 80p per share. ABC Ltd decides to grant the option with a 80p exercise price;
  • Employees will only be granted the options so long as they agree to save a fixed amount per month, up to a maximum of £500 per month, for a minimum of three years. Therefore the total of their savings and interest will provide enough money for them to exercise their options at the end of the saving plan term;
  • Bob, one of ABC’s employees decides to save £50 per month for five years. After five years, this will give him £3,000 plus a tax free interest bonus of £0 (current rate = 0.0 x £50), giving Bob a total £3,000.
  • Bob is granted an option to buy 3,750 shares.
  • Five years later the share price has increased to £2.50. Bob uses his savings to exercise his option in full paying £3,000 for shares that are now worth £9,375. Bob makes a gain of £6,375.

If Bob had used an option that didn’t benefit from HMRC approval he would have to pay income tax and possibly NI on this benefit (even though it may only be a paper gain if he hasn’t yet sold the shares). However, because this option is a HMRC approved SAYE option, he doesn’t have to do so.

What happens if the value of shares doesn’t increase?

There is no obligation on the employees to exercise their option and instead they could simple keep their savings and any bonus.

If the share price were to remain static or fall in value the employees would probably decide not to exercise their options as there would be little benefit in doing so.

Any benefits to the company?

Yes. The employer should be able to make a corporation tax deduction for any gains made when the options are exercised by employees.

Why should we choose it?

The SAYE scheme can help to align employee and company interests as the employees have a vested interest in the company doing well over the period of their savings plan and the longer term.

From the employees perspective they carry little risk until they exercise the option as should the share value decrease they can decline to exercise the option and instead remove their cash from the savings plan.

Does this create immediate ownership?

No, the SAYE option may never be exercised and until the point that it is the employee doesn’t become a shareholder, benefit from dividends, or have a tangible stake in the business.

How can we help?

If you are exploring employee share schemes, we can help you to identify the most appropriate scheme to suit your objectives. We have a track record of establishing schemes and explaining the benefits to employees. We are happy to meet at client’s offices, or at our London office, without charge or future obligation. Please contact us for an initial discussion.