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 an SAYE plan works 

Employees are granted options that 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 at the end of the savings period 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 since 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.  

SAYE Example 

On 1 June 2023, 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 £9,099*. The share price is now £1.60. The employee exercises his options over 11,373 shares and sells them all. 

Option exercise - No tax or NIC is payable. 

On disposal of the shares: 
Sale proceeds:                                       £18,196 
Less: base cost (i.e. exercise price)      (£9,099) 
Chargeable gain:                                    £9,097 

The employee makes a profit of £9,097 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 £610 to pay (£1,219 for higher rate taxpayers) after the £3,000 CGT annual exemption**. 

*Since SAYE bonus rates are currently at 1.1% for a three year savings contract, the bonus is included in this figure. However, if we were to return to the recent era of low interest rates and the SAYE bonus rate were to drop to 0% again, no bonus would be added.  

** Whilst the CGT annual exemption was £6,000 for the 2023/24 tax year, it is now £3,000 for the 2024/25 tax year onwards and therefore the lower annual exempt amount has been used in the above example where the SAYE option is exercised in the 2026/27 tax year. 

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. 

SAYE 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. 

Consultation 

As part of its on-going review of tax-advantaged share schemes, HM Treasury has been looking at both the SAYE and the Share Incentive Plan (“SIP”) (being the other all-employee tax advantaged scheme). As part of this consultation, advisers and industry groups have put forward suggestions that the maximum participation saving limit of £500 per month under the SAYE should be increased and that the available maximum 20% discount to market value should also be increased to make the SAYE scheme more attractive to a wider range of companies. Low interest rates have until recently meant that the bonus rate for the SAYE has been nil and higher bonus rates equivalent to the Bank of England base rate or comparable savings rates available in the market may also enhance the SAYE.  

An announcement on the response to the consultation is due any day now. 

Expert advice on Share Plans and Incentives 

If you have any questions about save as you earn plans, or any other share plans for your business, please get in touch – our team of specialists will be happy to help you.  

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