Savings-related share option schemes tend to be set up by large, often listed, companies, because of the large number of shares required to satisfy potential employee demand, and because private companies often find the restrictions on the rights that can be attached to scheme shares unattractive
Employees are granted options over ordinary shares in the company’s share capital, to be exercised after three, five or seven years, dependent on the scheme rules. A market value is agreed for the shares with the Shares Valuation Division of HM Revenue & Customs (HMRC). All full- and part-time employees and full-time directors must be offered the opportunity to take part, provided they are Case 1 Schedule E taxpayers and are employed by the company at the date of grant of the option.
Participants can save between £5 and £250 per month, to be used to acquire shares at the end of the three, five or seven years specified in the plan, by entering into a SAYE contract with a bank or building society. The sum is deducted at source each month. At the end of the period they also receive a tax-free bonus and then have six months to decide whether to:
- use the money (plus any accrued interest) to exercise the options, and buy shares at the value agreed at the time of the grant, or at a discount of up to 20% on that value
- take the money (including the tax-free bonus)
Employee ownership, in some ways similar to share schemes for employees, has become easier and more beneficial to smaller firms.
Who can participate in a SAYE
The company can specify a qualifying period, not exceeding five years, during which employees and directors must have been continuously employed or in office, before they can participate in the scheme. They must be employed both at the time of the grant of the options, and their exercise.
If, however, the company is a ‘close’ company (under the control of five or fewer participators, or of its directors) no-one who owns more than 25% of the company is eligible to participate.
Participants may only join the scheme at the launch date.
Employees’ tax under SAYE
Since 2013, where your employees' individual circumstances differ, they may get a different tax bill - the length of time they have held shares, for instance, can affect how much tax they pay. Where tax on employment income is liable in relation to employee shares you need to consider whether the shares count as Readily Convertible Assets (RCAs) - HMRC rules about the definition apply to your company. If the shares are RCAs then income tax and NICs should be paid through the PAYE system. If the conditions are met, there is no tax or NIC on either the grant or exercise of the option, nor tax on the bonus. When the shares are sold, capital gains tax or income tax is payable, although the following may apply to reduce or eliminate the gain:
- the annual exemption
- business asset taper relief is available for any gain after the exercise of the option
The shares can be transferred into an ISA or a stakeholder pension, tax free, provided this happens within 90 days of exercising the option.
The rules allow the company to distinguish between ‘good’ and ‘bad’ leavers (ie good leavers leave because of injury, disability, retirement or redundancy, whereas bad leavers leave voluntarily or are sacked with good cause), and treat each differently if they leave the scheme within the three, five or seven year period.
Bad leavers who fail to complete the period of their savings contract lose their right to exercise their options, but keep their accrued savings. Good leavers can exercise their options, to the value of their accrued contractual savings and, if they do so within six months of leaving, will not pay tax or NIC.
If an employee with a five or seven year savings contract leaves within the first three years because of illness, they can’t exercise the option until three years has expired and then only to the extent of their accumulated savings. Options of an employee with a three year contract will lapse when they leave.
Employers’ tax under SAYE
Employers can deduct costs of setting up the scheme from profits for the purposes of calculating corporation tax liability, provided the relevant options are granted after the scheme has been approved by HMRC.
Always take legal advice before setting up a SAYE scheme.