Save As You Earn (SAYE) Share Option Schemes for Employees
Tax and Employee Share Schemes: Save As You Earn (SAYE)
In this week’s newsletter, Dragon Argent continue our series looking at how to incentivize employees with share option schemes.
This installment covers Save As You Earn (SAYE) plans, also known as a savings-related share option plan or 'share save'. These are a tax-advantaged share plan under which, the employee is granted an option to purchase shares which, like other schemes, is tax advantaged but, unlike others, the employees are also required to enter into a linked savings arrangement with a bank.
Under the savings arrangement, an amount will be deducted from the employee’s salary and placed into their savings account. When the option is exercised, the exercise price can only be paid by using these savings and any tax-free bonuses awarded under the savings arrangement.
The scheme is risk free for the employee because they don’t have to exercise the option to release value, they can instead choose to just keep the proceeds of the savings arrangement when it reaches its maturity date. A summary of the advantages and disadvantages of SAYE Options Schemes is outlined below:
What are the advantage and disadvantages of a Save As You Earn (SAYE) Scheme?
ADVANTAGES
Tax advantaged scheme which means that as long as the scheme remains a 'Schedule 3 SAYE option scheme':
✔️ Employee benefits
No income tax will be payable if:
(a) the SAYE option is exercised on or after the 3rd anniversary of the date of grant;
(b) the SAYE option is exercised prior to the 3rd anniversary of the date of grant in particular circumstances where the option holder leaves or certain events occur.
(c) SAYE options granted at least 2 years before the option shares are sold may qualify for Business Asset Disposal Relief if they represent 5% or more of the company;
✔️ Company benefits
(a) as long as the scheme is a 'Schedule 3 SAYE option scheme' PAYE and NICs will not arise;
(b) there is potentially corporation tax relief available for the company on the acquisition of shares following the exercise of an SAYE option;
(c) the company can make use of a corporation tax deduction on the set up costs of the scheme
✔️ Relatively risk free for employees
✔️ There is some flexibility in relation to the exercise price for the options – it can reflect a discount of up to 20%
DISADVANTAGES
❌ The company must be a qualifying company
❌ The scheme must be offered to all eligible employees
❌ Self-certification to HMRC is required
❌ Registration of the scheme as well as annual filings are required within strict time limits
❌ Deductions from the employee's salary are subject to a maximum of £500 per month
❌ Savings are taken from net pay (this is not the case for SIPs)
❌ Complex and costly set up
❌ Involve a savings carrier
❌ There are minimum holding periods before which the options cannot be exercised depending on the length of the savings contract in order to be eligible for the tax advantages
❌ A valuation will need to be carried out by the company and agreed with HMRC prior to making any grants
SAYE Schemes Are Best Used When:
✔️ you are a large company
✔️ there are a lot of employees to justify the costs of scheme set up
✔️ most if not all employees are UK resident
✔️ the company is prepared to pay significant costs up front to establish the scheme and ongoing costs to administer it
✔️ employees already hold a significant amount of shares so are ineligible under other schemes
✔️ employees are comfortable waiting for 3 years before they can exercise the option
Requirements
Employers can setup an eligibility period relating to how long an employee worked for the business which can be maximum of five years’ service. If the SAYE scheme meets certain requirements any employee can be eligible for the scheme. Tax advantages are available in relation to such share options.
The main requirements for a scheme to qualify concern:
✔️ All employees are to be given the chance to be included in the scheme on certain terms
✔️ The sort of shares that can be used in the scheme
✔️ Fix a price for the shares under an option
✔️ Fix a set period for exercising an option to buy shares
✔️ Use only the special saving contract to buy the shares
For any questions you have regarding any share option scheme, contact us by scheduling a discovery call with one of our experts and we will be happy to help you.
Disclaimer: the guidance contained in this article is not a substitute for legal advice. Before implementing any option scheme, you should seek appropriate advice from a qualified legal professional.
Book a call with our Corporate & Commercial Law Solicitor today ↓
Relevant guide to Employee Share Option Schemes:
Take our two-minute quiz
Find out if your business is eligible to use an EMI Share Option Scheme in just a few minutes.
Watch our recorded EMI webinar:
A roundtable discussion and Q&A on what an Enterprise Management Incentives (EMI) Scheme is, what its benefits are, and how it can be used to incentivise key employees in a tax-efficient way.
How does a Company Share Option Plan (CSOP) Work
A Company Share Option Plan (CSOP) is a tax-advantaged, discretionary share option plan where a company can grant CSOP options to any employee or full-time director. Learn more.
A Guide to Issuing Shares to Employees
One of the most common challenges that early-stage businesses face is how best to recruit and incentivise talent at a time when funds are tight. One tool that founders reach for when trying to supplement salary is the offer of equity in the business. Learn more.
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