SAYE plans are approved by HMRC and offer tax advantages for employees and employers
Save as you earn plans encourage employees to regularly save and buy shares in their employed company, with the savings. SAYE plans are approved by HMRC and offer tax advantages for employees and employers.
How SAYE plans work
Under a SAYE plan, employees receive an option to purchase the shares in the employer company for a discounted price, with monthly savings from their post-tax salary. This is done via a savings contract for 3 or 5 years. SAYE is an all employee plan which has to be offered on equal terms to the whole workforce.
Employees can save anywhere between £5 and £500 a month and they can decide how much they want to save per month. However, once agreed, the amount payable cannot be changed. The savings are accumulated over the duration of the contract.
Employee buys the shares
After the option contract matures the employee can:
- Buy the number of shares agreed at the date of the option contract; or
- Ask for the savings to be repaid.
The price paid for the shares is known as the exercise price. The exercise price is determined by the employer who can set the exercise price to be up to 20% lower than the current market value of the shares at the time of option grant. Employees benefit twofold – from the discount and from the lesser share price when they purchase the shares (provided the value of the company increase from the date of grant). SAYE plan is risk free for the employees.
SAYE plan – employee leaves
The exercise of SAYE option will be permitted on the termination of employment depending on the reason for the termination. Exercise will be permitted within 6 months in the following circumstances:
- Injury; or
- Death (exercise allowed within 12 months); or
- Statutory redundancy; or
- Retirement; or
- Sale of the employer company.
If the employee resigns before the contract matures, he will not be able to exercise the option to purchase the shares and all the accumulated savings and interest will be repaid to him.
Once the employee exercises the option, he becomes a shareholder and he will be bound by the employer’s articles of association and/or any shareholders’ agreements which may impact transferability of the shares and influence the value he will receive for his shares on sale.
Explaining employer suitability for SAYE plan
To qualify for the HMRC approved SAYE plan the following criteria need to be met:
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 not controlled by another company.
The shares must be:
- Ordinary; and
- Fully paid up; and
- Non redeemable; and
- In the employer or the parent company; and
- Have rights which make them no less valuable to the shares held by non-employee shareholders.
The employees must:
- Have a qualifying period of service but the period cannot be longer than 5 years;
- All be UK resident employees and full-time directors must be invited to the scheme;
- Foreign employees can be invited to the SAYE plan.
Before the SAYE plan is set up the employer has to value the shares and decide the exercise price. HMRC approval must be sought. Often a professional share valuer is engaged.
The employer company appoints a savings provider, usually a bank, to hold the money saved by employees under the SAYE plan. The company will administer the plan with the help of the savings provider but administrative burden can be significant.
SAYE plan: HMRC reporting
The employer has to file an annual return with HMRC every year on 6 July following the end of the year in which SAYE plan was operated.
Taxation of SAYE plans
The plans are “HMRC approved”, and offer tax-savings on the:
- Option grant when employer and employee enter into a savings contract;
- The exercise of the SAYE option if the employee held it for at least 3 years
- On a takeover of the employer company if the SAYE option has not been held for 3 years
- Interest earned by the savings account;
- Gains made when exercising the options if SAYE shares are put into an ISA
- Corporation tax deduction for the employer company on the exercise of option provided certain criteria are met.
Save As You Earn plans are usually more suitable for large enterprises that employ a large workforce. It is a tax efficient way of providing equity to the employees.
A highly experienced and practical lawyer with an additional qualification as a Chartered tax advisor, Catherine is also a regular writer and speaker for a variety of commercial organisations.