Save As You Earn options ("SAYE" or "Sharesave")
Independent companies (and certain subsidiaries of listed companies) may, if all statutory requirements are met, grant options to all employees to acquire shares at the end of a fixed option period of 3 or 5 years.
The price payable upon exercise of the option may be set at a discount of up to 20% of the market value of the shares at the time of grant.
Options may be granted at regular intervals, or on one occasion only, but whenever invitations are issued they must be issued to all eligible employees. A qualifying period of continuous employment of up to 5 years may be set with the company also allowing other employees to join.
How does it work?
The share option is linked to a savings contract with a bank or building society under which the employee commits to making 36 or 60 monthly savings contributions of up to (currently) £500 out of net (after tax) pay and deducted from salary. The company can however set a lower limit if it wishes.
The savings may be augmented by a tax-free bonus, expressed in terms of a multiple of monthly savings, added at completion of the 36 or 60 savings contributions – effectively this substitutes for interest. However, recent low interest rates mean that the bonus rate (set by the government) has in recent years been minimal or nil.
At the end of the savings period the employee may - but need not - exercise the option and purchase the shares at what is then hoped will be an undervalue. If the share price has fallen below the exercise price then the option can be allowed to lapse and the employee simply takes out their savings and bonus.
What is the tax treatment?
Any amount of option gain should normally be free of income tax and NICs. Instead, any gain (over the exercise price) realised on a disposal of the option shares is charged to CGT, subject to any available annual exempt amount.
For many lower rate taxpayers the gain on a sale of the shares is effectively free of tax.
How is the scheme administered?
An SAYE share option scheme must be operated in conjunction with a savings carrier which may, but need not be, the same as the organisation responsible for the record-keeping and administration of the scheme.
The terms of the share option are prescribed by legislation and are relatively inflexible, particularly as regards the terms upon which options may be exercised, or must lapse or may be exchanged, in the case of early leavers or a takeover, etc.
Data is published by HMRC each year on SIP and SAYE usage statistics and there is an annual survey performed by ifs Proshare which is often revealing in terms of how all-employee share plans are put into practice.
Offering an exercise price with the full 20% discount can be expensive in terms of the associated accounting charges and, for this reason, many listed companies are restricting the benefit by choosing to offer only a smaller, or even no, discount to the market value at the time of grant.
Whilst employee optionholders cannot be prevented from allowing their SAYE options to lapse if the share price has fallen (in order to take out a fresh option at a lower exercise price), this can trigger unforeseen and substantial accounting charges. Companies can avoid or reduce the risks of such charges. Please contact us for more details.
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