Out-Law Guide 4 min. read
24 May 2022, 4:25 pm
The proceeds of the savings contract, which may include a tax-free bonus, are used to acquire shares in the company for a price fixed when the share option is granted. This may be set at a discount of up to 20% below the market value of the shares at that time. No tax is charged on the grant of the share option and, in almost all circumstances, no income tax or National Insurance contributions (NICs) will be charged on any profit made when the option is exercised.
The SAYE option is normally exercisable only after a fixed period of three or five years beginning with the start of the savings contract. At the end of this period the employee may exercise the SAYE option and acquire the shares. A SAYE option is risk-free for the employee: if the market value of the shares has fallen below the option exercise price or the employee no longer wishes to acquire shares in the company, the employee can choose not to exercise the SAYE option and instead take the cash, and any tax-free bonus, from the savings contract.
HMRC is responsible for fixing the tax-free bonus and any interest payable on SAYE savings contracts. However, due to very low prevailing interest rates, no bonus or other interest has been payable on SAYE savings contracts since the end of 2014.
SAYE options are usually granted by the company, but can also be granted by a trustee of an employees' trust or an existing shareholder.
The plan rules must provide that every employee and full-time executive director of the company and any participating company who:
must be invited to participate in the plan on similar terms. Other employees and directors may be allowed to participate at the discretion of the company.
In almost all circumstances, no income tax or National Insurance contributions will be charged on any profit made when a SAYE option is exercised.
All participants must be entitled to participate in the plan on similar terms as to option exercise price and conditions of exercise. Normally an identical offer is made to all eligible employee; however, it is possible to vary the number of shares over which SAYE options are granted by reference to objective criteria, such as salary or length of service.
The savings contract must be a standard form SAYE contract provided by the bank or building society selected by the company. Depending on whether the company offers a three year or a five year savings contract, participants will agree to make either 36 or 60 regular monthly contributions from their salary or wages, or the weekly equivalent, of a fixed amount between £5 and £500, unless the company caps the monthly maximum savings amount at a lower figure. The amount of the contributions is fixed at the outset of the contract and cannot be altered.
The shares over which the SAYE options are granted must form part of the ordinary share capital of the company which establishes the plan or, in the case of a group plan, its controlling company. They must be fully paid up and not redeemable by the company.
Normally, a SAYE option cannot be exercised until after the bonus date. However, if the employee leaves employment as a 'good leaver' - that is, through illness, disability, injury, redundancy, retirement or death - the SAYE option can be exercised early using the amount of savings in the savings account at the time. Options can also be exercised early in the case of certain corporate events, such as the sale of the company or business in which the employee works.
Employees can stop saving at any time before the end of the savings contract and will be entitled to their total contributions to date repaid in full. Generally, an employee may defer up to 12 monthly payments without the associated SAYE option lapsing. Where the deferral is for reasons related to the Covid-19 pandemic, there is no limit on the number of monthly payments that can be deferred. From 6 April 2022, however, this easement is no longer available for new savers.
Advantages for the employee are:
If and when the shares are sold by the employee, capital gains tax (CGT) rules apply on any gain or loss made on sale. The base cost of the shares is treated as the option exercise price and not the market value of the shares on exercise. As at May 2022, CGT is charged at 10% for gains within the basic income tax band after taking into account any annual tax exempt amount, and at 20% for gains above this level. In practice, taking into account the annual CGT allowance, very few individual participants in SAYE plans make gains that are sufficiently large to bring them into the CGT net.
Shares acquired on the exercise of an SAYE option may be transferred into an ISA within 90 days of exercise, so avoiding a charge to CGT when the shares are subsequently sold, and enabling tax-free receipt of dividends on the shares.
For the employer, a corporation tax deduction will normally be available when SAYE options are exercised on gains made by employees. No employers' NICs are payable on the grant or exercise of a SAYE option.