Save As You Earn (SAYE) Share Option Plans

Out-Law Guide | 03 Aug 2011 | 11:15 am | 4 min. read

This guide was last updated in April 2014.

A Save As You Earn (SAYE) plan, also known as a savings-related share option plan or 'sharesave', enables eligible employees of a company to be granted options to acquire shares – linked to three or five year savings contracts – in either the employer company or, in the case of a group plan, the holding company.

The proceeds of the savings contract, which may include a tax-free bonus, are used to acquire shares in the company for a price fixed when the share option is granted. This may be set at a discount of up to 20% below the market value of the shares at that time. No tax is charged on the grant of the share option and in most, but not all, circumstances no income tax will be charged on any profit made when the option is exercised.

The share option is normally exercisable only after a fixed period of three or five years beginning with the start of the savings contract. At the end of this period the employee can exercise the option and acquire the shares. However, if the market value of the shares has fallen below the option exercise price or the employee no longer wishes to acquire shares in the company, the employee can instead choose to be repaid the cash proceeds of the savings contract including any tax-free bonus.

Who grants the options?

SAYE options can be granted either by the company itself, or by the trustee of an employees' trust or other existing shareholder.

Who can participate in a UK SAYE plan?

The plan's rules must provide that every employee and full-time executive director of the company and any participating company who is over the age of 16 and:

  • has been employed at all times during a qualifying period of up to five years; and
  • is resident in the UK for tax purposes

must be invited to participate in the plan on similar terms. Other employees and directors may be allowed to participate at the discretion of the company.

All participants must be entitled to participate in the plan on similar terms as to share price and conditions of exercise. It is possible to vary the number of shares over which options are granted by reference to objective criteria, such as salary or length of service. In any event, employees will only be able to obtain as many shares as they can fund from the proceeds of their own savings contract.

The savings contract

The savings contract must be a standard form SAYE contract provided by the bank or building society selected by the company. Participants will agree to make either 36 or 60 regular monthly, or the weekly equivalent, contributions from their salary or wages of a fixed amount set at between £5 and the monthly maximum. From 6 April 2014, the monthly amount will be doubled from £250 to £500. The amount of the contributions is fixed at the outset of the contract.

When all the agreed contributions have been paid, on what is known as the "bonus date", the participant's account ma be credited by the savings carrier with a tax-free bonus which is the equivalent of further monthly contributions in lieu of interest. The bonus rates are fixed by HMRC.

The shares

The shares themselves must form part of the ordinary share capital of the company which establishes the plan or, in the case of a group plan, its controlling company. They must be fully paid up and not redeemable by the company.

When can employees exercise their share options?

Normally, a share option cannot be exercised until after the bonus date. That can change if someone is deemed a good leaver, meaning that they left through illness, disability, injury, redundancy, retirement or death. Options can also be exercised earlier in the case of certain corporate events such as a sale.

Can employees cancel a savings contract?

Employees can stop saving at any time before the end of the savings contract and will be entitled to their total contributions to date repaid in full. If repayment is made before the first anniversary, no interest will be payable. An employee may defer up to six monthly payments without the associated option lapsing.

Tax advantages

Advantages for the employee are:

  • any bonus or interest received under the savings contract is tax free;
  • no income tax or National Insurance contributions/NICs are charged on the grant of a share option; and
  • no income tax (or NICs) is charged on the exercise of an optionafter three years – or if it is exercised within three years of grant as a result of the employee leaving in one of the specified “goodleaver” circumstances. No income tax (or NICs) is charged on the exercise of an option in consequence of  "comany events" unspecified circumstances.

If and when the shares are sold by the employee, ordinary capital gains tax (CGT) rules apply on any gain or loss made by that sale, except that the base cost of the shares is treated as the option exercise price and not the market value of the shares on exercise. CGT is charged at 18% for gains within the basic income tax band after taking into account any annual tax exempt amount, and at 28% for gains above this level.

Shares acquired on the exercise of an SAYE option may be transferred into an ISA within 90 days of exercise, so avoiding a charge to CGT when the shares are subsequently sold, and enabling tax-free receipt of dividends on the shares.

For the employer, a corporation tax deduction will normally be available when options are exercised on gains made by employees.

Share-based payment charge

Regardless of where they are based, most companies will need to recognise the fair value of any share options granted under an SAYE plan as a share-based payment expense in their company accounts. However, that accounting cost will usually be modest in comparison to the potential benefits of an SAYE plan and may be counterbalanced by any corporation tax relief on excercise. SAYE plans therefore remain a popular means of rewarding employees and encouraging employee share ownership.