UK: Save As You Earn ("SAYE")

Last Updated: 23 April 2012
Article by Smith & Williamson

SAYEs were introduced in 1980 as the first tax favoured scheme to encourage all employees to own shares in their employing company or, if a group of companies, in the parent company. Awards under a SAYE are commonly used as a means of rewarding, incentivising or retaining employees or for a combination of these objectives.

What is a SAYE?

SAYE is an HMRC approved share option plan designed to encourage employees to enter a regular savings plan to enable them to acquire shares in their employing company and to participate in the growth of the company. The saving scheme for each investor cannot exceed £250 per month under either a three year or a five year plan. Provided the saving plan period is completed the investor will be entitled to a standard bonus. Those opting for the five year plan can chose to leave their contributions in the plan for a further two years and receive an additional bonus.

Why use a SAYE?

The main benefit of the plan is that employees can acquire shares in the company without incurring an income tax liability and can participate in the increased value of shares at capital gains tax rates. In addition neither the award of the options or the exercise of the options gives rise to a national insurance liability which is advantageous to both the employee and the company.

Employees value both the tax efficient nature of the plan including the opportunity to receive a tax free bonus and interest and the opportunity to participate in the growth of the company which in turn can have a positive impact on motivation and retention.

How does a SAYE work?

The employee is awarded options over shares in the employing company (or if a group in the parent company) with an exercise price not less than 80% of the market value of the shares at the date options granted. This discount effectively provides the employee with a built in profit, assuming the share price does not fall below the discounted price. The employee pays monthly into a certified SAYE savings plan for three or five years to to accumulate the money to exercise the options. Terminal bonuses are payable at an appropriate (approved) HMRC bonus rate. Bonuses and interest earned on the saving plan are tax free

Options cannot be exercised within three years of grant, except in limited circumstances.

Once exercised the employee then owns the shares and will be subject to capital gains tax when the shares are sold.

Accounting

Under both UK GAAP and IFRS the SAYE will be regarded as a share-based payment arrangement, with the detailed accounting treatment being determined by reference to the terms of the plan.

Share-based payment arrangements can be either "equity-settled" or "cash-settled".

When the SAYE is accounted for as an equity-settled arrangement, the charge to the profit and loss account is calculated by reference to the fair value of the options at grant date determined using an appropriate financial model. The period over which the charge is made will be determined by the terms of the arrangement. When the SAYE is accounted for as cash-settled, the fair value of the future liability is re-measured at each reporting date and again at settlement. Advice should be sought as it is not always certain which accounting method will apply and this may vary between the group and subsidiary level.

The charge will be adjusted in each year to take account of the company's expectation of the number of options that will ultimately vest - i.e. amended to reflect anticipated leavers.

The requirement for employees participating in a SAYE scheme to make payments into the plan is what the accounting standards call a "non-vesting" condition. Where an employee ceases to make the required payments this is regarded as a cancellation of the scheme in respect of that employee. The share-based payment charge is accelerated such that the total fair value through to the vesting date is recognised immediately in the profit and loss account.

In circumstances where an employee benefit trust is used to facilitate the arrangement, although the shares will be held in a separate trust, both UK GAAP and IFRS require that the shares are reflected in the accounts of the company.

Corporation Tax

The employer will usually qualify for a corporation tax deduction when the employee exercises the options equal to the difference between the exercise price and the market value of the shares on exercise.

A corporation tax deduction is also available for the cost of setting up the approved SAYE scheme,

Income Tax and NIC

No income tax or national insurance liability arises on either the grant of the option or on exercise of the options. There are special provisions for redundancy and retirement.

If the employee chooses not to exercise the options, the original contributions are repaid along with the bonus and interest that remains tax free. If repayment is requested within the first year of the plan, no interest is paid. If repayment is taken after the first year, but before the end of the plan, interest is paid according to the relevant percentage for the plan.

Capital Gains Tax

A capital gains tax liability will arise when the employee disposes of the shares. The chargeable gain will be based on the sale proceeds less the price paid to exercise the option.

For whom is a SAYE suitable? The use of a SAYE is particularly attractive to the following types of employers:

  • Companies seeking to encourage all employee share ownership through tax efficient share acquisition.
  • Companies seeking to align the employees' interests with those of the company and other shareholders to ensure growth.

How we can help. We can:

  • confirm that the legislative requirements to be satisfied on issuing share options are met;
  • draft scheme rules and customise these as applicable;
  • prepare supporting documentation including a tax memorandum and empoyee explanatory booklet;
  • obtain the required advance approval of the scheme from HMRC; obtain HMRC agreement on the valuation of the market value of shares at the award date;
  • assist with the annual Form 34 return.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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