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Save As You Earn (SAYE) Option Schemes

Do you want to set up a save as you earn option scheme for your company’s employees? Do you participate in a save as you earn option scheme and you are unsure what your rights are? Suzy Giele from our team at EM Law is one of the UK’s leading experts on save as you earn option schemes as well as other types of share incentive schemes.

Introduction

A save as you earn scheme (also known as sharesave scheme) is an arrangement where a company’s employees can set aside some of their salary to buy shares in the company at a discount.

SAYE is a Government-backed scheme so, as long as the scheme complies with statutory requirements, it offers tax breaks for participants. For example, there is normally no income tax to pay despite the employee being able to purchase shares at a discount.

The Scheme

Under a save as you earn scheme, employees are given options to buy shares in their company employer at a later date. The exercise price for the grant of the options can be discounted by up to 20% of the market value of the shares at the date of the grant of the options.

Participants in the save as you earn scheme must take out an HMRC-certified linked savings arrangement with a bank or building society for the purposes of the scheme. The company employer pays into the savings accounts by deducting up to £500 each month from the participants’ salaries at source.

All employees/directors must be allowed to participate on similar terms.

The company can specify that employees and directors must have been employed by the company for a period of up to five years before they can participate in the save as you earn scheme.

The shares that can be purchased under the option scheme must be ordinary shares and satisfy various conditions. For example, the shares cannot be redeemable.

The price at which the shares in the save as you earn scheme may be bought must be fixed when the option is granted and may not be less than 80% of the market value of the shares at or shortly before the date of invitation to participate. If the shares are not quoted on a recognised stock exchange the market value of the shares must be agreed in advance with HMRC.

Participants may use the cash accumulated in the savings account to pay for the option shares when they exercise the option. Alternatively they can choose to have the savings and any bonus paid out to them in cash for them to spend as they like (it will not be worth exercising the option to purchase shares if the shares have fallen below the set option price).

Lapse

Typically, the save as you earn scheme rules will state that the share options will lapse:

  • When the participating employee leaves the company (although early exercise must be permitted if the employee has left as a “good leaver” (e.g. employee has been made redundant).
  • If the employee withdraws the savings before being permitted to or misses more than six monthly savings payments.
  • If the employee becomes bankrupt.
  • If the employee tries to transfer the options to someone else.

Tax

  • There is no income tax liability on the grant of the option.
  • Any interest and bonus under the savings contract is tax-free.
  • There is no income tax liability on exercise of the option after three years of the option being granted. If the option is exercised within three years of grant then income tax will be payable unless special circumstances apply, for example, the participant left the company due to redundancy, retirement, injury or certain other reasons.
  • NICS are not payable provided the scheme retains its tax-advantaged status.
  • On a sale of the option shares, capital gains tax may be payable on any gain over the amount paid for the shares.
  • Companies themselves are entitled to a tax deduction on the costs of running the scheme.
  • When save as you earn options are exercised, the employer normally obtains a statutory corporation tax deduction.

For any questions you may have concerning save as you earn schemes contact Suzy Giele.

Save As You Earn (SAYE) Option Schemes EM Law Suzy Giele

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