Interest rates are rising fast and it’s affecting share plans. If you operate a Save-as-you-Earn scheme then be aware that bonus rates are set to increase. So what steps do you need to take now, to be ready for that change? We’ll look at that.
The background to this is the Revenue, with an eye on rising interest rates, is reviewing the methodology used to calculate the bonus rate which applies to savings contracts under SAYE schemes which they say is too complex – they want to simplify it. The bonus rate applicable to an SAYE savings contract is set at the time the savings contract is entered into and is unaffected by any subsequent change to the rates. Since 2014, HMRC has set the bonus rate at 0%, meaning companies have not had to establish any processes for applying bonus rates to savings contracts under their SAYE schemes. The expectation is that HMRC's review of the methodology for setting the bonus rate is in anticipation of an increase to the bonus rate, to reflect rising interest rates.
It was back in June when HMRC published ERS Bulletin 43 announcing its intention to conduct a review of the bonus rate mechanism and, meanwhile, the bonus and interest rates on SAYE contracts have been paused at 0%. In their latest Bulletin, number 45, they restate the position. They say: ‘We have been considering options to simplify the mechanism. We will engage with industry experts to understand their views on the options and will provide a further update once we have held these discussions.’
Meanwhile, as we wait for that update, companies that operate SAYE schemes are planning for a potential increase in bonus rates that could occur prior to the issue of their next set of SAYE invitations. So they are looking at whether the existing scheme rules accommodate for a bonus rate and whether any amendments are required.
So let’s consider all of that. Earlier, share plans specialists Lynette Jacobs and James Sullivan-Tailyour joined me by video-link to discuss this, including the steps they’re advising clients to take. I put it to Lynette that this is a big change:
Lynette Jacobs: “Yes Joe, that is right. It has now been almost 10 years, since 2014, that there was any bonus rate applicable to share savings contracts. It’s a big change because that's a long time for a start. Secondly, within many companies the people who will be involved in operating the share plans within the company may not have been working during the period when bonus rates were applied so therefore, they'll need to think about, and understand, the implications of this and check the rules to make sure the rules refer to it and then also how they are going to be applying that to their SAYE options and contracts.”
Joe Glavina: “So why is the Revenue doing this now, Lynette? What’s the driver?”
Lynette Jacobs: “Two reasons. One is because the current mechanism they have is complex, that's the background they have given as to why they are doing this but, more importantly, it's because at the moment if someone chooses to apply £100 and put it into a sort of normal savings account, they'll be starting now to get a small amount of interest paid on their savings. If at the moment they instead decide to put that money into a share save savings account, they'll get no interest. Clearly, particularly if interest rates start to rise further, an employee is not going to be encouraged, or want to sign up for, a savings contract associated to an SAYE, a share save option, if by doing that they get no interest on the savings when they could otherwise choose to put the money in a bank and have savings on that money. So that will be sort of a discouraging feature for them to participate in the plan and that’s why HMRC is considering this so that people will be in sort of an equal position if they save their money through their SAYE option arrangements.”
Joe Glavina: “So, James, on a practical level, what should HR teams be doing? I guess they have an important role here?”
James Sullivan-Tailyour: “Yes, absolutely, there are a few things that can be done by HR people now to get ready, I think the first thing is to review your share save communications that you send to employees and invite them to take part in the share save, and see whether any updates are needed to those to reflect the fact that a bonus might be payable on savings contributions that are made for the upcoming invitation and that might be particularly important if you're anticipating issuing your invitation in the autumn, which is around about the time that we're anticipating HMRC might also increase the bonus rates. So, I do think it's worthwhile having those revised communications on the stocks, if you're in that situation, so that there's not a mad rush two or three days before the invitation issue date to update comps to reflect an increase in bonus rates. I think the other thing, the slightly more mechanical thing, is to think about whether all of your processes and procedures are in place to deliver those additional bonus shares to share save participants and that will require some engagement with the company secretarial team to make sure that they're aware that there might be some additional share issues that are required. I also think it's worthwhile speaking to finance and accounting colleagues to make sure that the impact of the increase in bonus rates, and the increase in share usage that it implies in connection with the share save, is taken into account in the relevant modelling. For example, it might be necessary to slightly modify the basis on which any scaling back of share save applications takes place because the increase of a bonus rate, particularly if it's quite large to reflect rising interest rates, means that share usage is going to be quite a lot higher, or a little bit higher, this year than in in previous years. I think it is worth front-loading a lot of this to the extent possible, just so that companies aren't caught out if the bonus rate increases overnight, and maybe two, three, days or a week, before invitations are due to be issued. You don't want to get caught out and feel like you can't offer a bonus to share save participants because you haven't got your ducks in a row.”
Joe Glavina: “So, Lynette, it sounds like there’s an important communications piece for HR here, putting all this to the participants?”
Lynette Jacobs: “Yes, they need to understand it, and also you’ll need to be explaining that to your finance team, or to whoever in the company makes decisions about share save to say, you know, if we’re doing our annual launch this year, or if we hadn't been thinking of doing it but maybe now this is a good reason because it'll be more attractive to employees to participate because by doing this there'll be in as good a position as they would be if they were going to be saving that £50 or £100 or £200 pounds a month, themselves independently.”
Joe Glavina: “A final question for you James. We’re in the middle of a cost of living crisis with inflation soaring. Is that having an impact on these plans?”
James Sullivan-Tailyour: “Yes, absolutely. So, at least anecdotally, I guess it's a little early for hard evidence as yet, but certainly anecdotally we're hearing that with the cost of living crisis really biting and the fact that people have got less disposable cash, participation in share save is falling off a little bit. Either participants are choosing to reduce the amount that they're committing to save in new share save invitations or, potentially, withdrawing from existing savings contracts all together and I think that relates quite well to this talk about potential increase in bonus rates. If an increase in bonus rates is introduced, and it is anticipated that one will be introduced, companies will obviously need to think carefully about whether they can afford to offer it in terms of the additional shares that are required to be issued to participants in satisfaction of the bonus, but also weighing that up, from the employees perspective, making sure that participation in a share save is attractive for participants by offering something that's competitive for the interest that they might receive by saving into a normal bank account. So the cost of living crisis, the wider context of rising interest rates, all plays into this piece and it needs to be considered in the round, absolutely.”
Lynette and James cover all of those points in some detail in their article ‘Employers operating SAYE told to prepare for potential increase in bonus rates’. You’ll find that on the Out-Law website and we’ve put a link to it in the transcript of this programme.
- Link to Employment Related Securities Bulletin 45
- Link to Out-Law article: Employers operating SAYE told to prepare for potential increase in bonus rates