Save As You Earn Plans

Save As You Earn (SAYE) plans encourage employees to save regularly and use their savings to buy shares in their employing company at a price fixed in advance. SAYE plans are tax-advantaged schemes that must meet statutory requirements and be registered and self-certified with HMRC.

If you need advice on a Save As You Earn plan or are considering setting one up for your business, we offer an experienced, cost-effective service. Please get in contact.

How SAYE plans work

Under a SAYE plan, employees receive an option to purchase shares in their employer company at a fixed price, potentially discounted by up to 20% from the market value at the date of grant. Employees save from their post-tax salary under a savings contract lasting three or five years. SAYE is an all-employee plan that must be offered to eligible employees on similar terms.

Employees can save between £5 and £500 a month. The monthly savings amount is fixed when the savings contract begins and generally cannot be varied during the contract. The savings accumulate over the term of the contract.

Employee buys the shares

After the savings contract matures, the employee can:

• Buy the number of shares covered by the option at the agreed exercise price; or
• Withdraw the savings, including any interest or bonus due, instead of exercising the option.

The price paid for the shares is known as the exercise price. The employer can set this at up to 20% below the market value of the shares when the option is granted. Employees may benefit from both the discount and any increase in the share price before exercise. However, the share price may fall, and employees can choose to take their savings back rather than buy shares. SAYE is therefore not entirely risk-free.

HMRC criteria for SAYE plan

To qualify as a tax-advantaged SAYE plan, the scheme must meet the statutory requirements, including the following.

The employer must be:

• A company listed on a recognised stock exchange; or
• An unlisted company controlled by a listed parent company; or
• An unlisted company that is not controlled by another company, subject to the detailed statutory conditions.

The shares must be:

• Ordinary;
• Fully paid up;
• Non redeemable;
• In the employer company or a qualifying parent company; and
• Subject to rights that meet the statutory requirements in relation to shares held by non-employee shareholders.

The employees must:

• Meet any qualifying period of service, which cannot exceed five years;
• Be eligible employees or directors under the scheme rules. All qualifying employees and directors must be eligible to participate on similar terms;
• Meet any applicable residence and employment requirements. Overseas employees may be eligible depending on the circumstances.

Before the SAYE plan is set up, the employer must value the shares and decide the exercise price. An independent professional valuation may be appropriate. HMRC approval is not required in advance, but the scheme must be registered and self-certified in accordance with HMRC requirements.

The employer company appoints a savings provider, usually a bank or building society, to hold employees’ savings. The company administers the plan with the savings provider, which can involve significant administrative work and ongoing reporting obligations.

SAYE plan – what happens if an employee leaves?

Whether an employee can exercise their SAYE option after leaving depends on the reason for leaving, how long they have held the option and the scheme rules. Early exercise may be permitted in specified circumstances, including:

• Injury or disability;
• Death (the applicable exercise period may be up to 12 months);
• Statutory redundancy;
• Retirement; or
• Certain business transfers or changes of control.

The applicable exercise period and conditions depend on the circumstances and statutory rules. For specified qualifying reasons, an option can generally be exercised within six months of employment ending.

If the employee resigns before the savings contract matures, they will generally lose the right to exercise the option and can withdraw their savings, subject to the applicable scheme rules.

Once the employee exercises the option, they become a shareholder and will be bound by the employer’s articles of association and any applicable shareholders’ agreement. These documents may restrict the transfer of shares and affect the price or terms on which the employee can sell them.

Taxation of SAYE plans

SAYE plans offer tax advantages, subject to the relevant requirements. These include:

• No Income Tax or National Insurance charge on the grant of the option;
• No Income Tax or National Insurance charge on the gain when the option is exercised under a qualifying scheme, subject to the applicable rules and exceptions;
• Tax-free interest and any bonus payable under the savings contract;
• Potential relief from Capital Gains Tax where shares are transferred into an ISA within 90 days of leaving the scheme or transferred directly into a pension, subject to the relevant conditions;
• Potential corporation tax deductions for the employer, subject to the statutory requirements.

SAYE plan: HMRC reporting

The employer must register and self-certify the scheme with HMRC and file an annual Employment Related Securities return by 6 July following the end of the relevant tax year. A nil return may be required where there are no reportable events.

Save As You Earn plans are often more suitable for larger enterprises with substantial workforces, given the administration involved. They can provide a tax-efficient way to offer employees an opportunity to acquire shares in their employer.