Save As You Earn (SAYE): How Does The Scheme Work
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Save As You Earn (SAYE) schemes, also known as Sharesave schemes, are a government-backed initiative allowing employees to save regularly and potentially benefit from purchasing shares in their employer’s company. SAYE schemes, which offer significant tax advantages, are often used as an employee reward mechanism to foster loyalty and incentivise staff.
What is SAYE?
SAYE is a savings-related share option scheme offered by employers to their employees. Participants agree to save a fixed monthly amount (up to £500.00) for a specified period, typically three or five years. At the end of the savings term, employees can use the saved funds, plus any tax-free bonus (where applicable), to purchase shares at a pre-determined discounted price. This discounted price is set when the scheme is launched and can be up to 20% below the current market value of the shares.
If employees choose not to purchase the shares, they can simply take back their savings, ensuring minimal financial risk.
How Does It Work?
Enrolment: Employees opt into the SAYE scheme and commit to saving a fixed monthly amount for the scheme’s duration.
Savings Period: Savings accumulate over the agreed term, typically held in a special SAYE savings account.
Option to Buy: At the end of the savings period, employees have the choice to:
· Use their savings (and any bonus) to purchase shares at the pre-agreed discounted price.
· Withdraw their savings without buying shares.
Tax Implications: No Income Tax or National Insurance is due on the difference between the market price and the discounted price when shares are purchased.
Rolling Gains into an ISA or Pension
A lesser-known but powerful benefit of SAYE schemes is the ability to roll shares into an ISA or pension, potentially avoiding Capital Gains Tax (CGT). Here’s how it works:
· Employees can immediately transfer SAYE-acquired shares into a stocks and shares ISA when exercising the share option. This transfer is subject to the ISA contribution limit, which is currently £20,000 per tax year
· If the transfer of shares is immediate, you will not have to pay any Capital Gains Tax on gains made during the ShareSave period
· This incentive remains valid for up to 90 days from the option date, however you may be liable to CGT for any gains during that time
· Once inside the ISA, future gains on the shares are sheltered from CGT.
· Alternatively, transferring shares into a pension can achieve the same result, however depending on your age, you may not be able to immediately access the capital
Short Worked Example: SAYE with ISA Transfer and CGT Savings
• Company: ABC Ltd
• Option Price: £10.00/share (20% discount).
• Market Price at Maturity: £20/share.
• Savings: £10,000 (over 5 years).
At maturity, the employee exercises the option, buying 1,000 shares (£10,000 ÷ £10). These shares are worth £20,000 at the market price, creating a gain of £10,000 (£20,000 - £10,000).
Step 1: Transfer to ISA
The employee transfers £20,000 worth of shares (all 1,000 shares) into a Stocks and Shares ISA immediately on the option date
Step 2: Sell Shares within ISA
The shares are sold at £20/share.
· Proceeds: £20,000.00
· CGT Liability: £0 (ISA shelter)
Without the ISA transfer, the £10,000 gain would exceed the CGT allowance (£3,000.00 in 2024/25), and £7,000 would be taxed at either 18% or 24% depending on their marginal rate of income tax. By using the ISA, the employee avoids this entirely.
This strategy allows employees to maximise tax efficiency, particularly for shares with high growth potential, making SAYE schemes even more appealing for long-term financial planning.
Advantages of SAYE Schemes
Low Risk: Participants can always reclaim their savings if they choose not to buy shares, protecting them from market volatility.
Tax Efficiency: No Income Tax or National Insurance is payable on the share discount, and rolling shares into an ISA or pension can eliminate CGT liability.
Employee Engagement: SAYE schemes align employee interests with company performance, enhancing engagement and loyalty.
Flexibility: Employees can opt out early in cases of financial hardship, albeit without the tax advantages.
Discounted Shares: The ability to purchase shares at a discount provides a potentially lucrative investment opportunity.
Disadvantages of SAYE Schemes
Market Risk: The value of shares can decline, meaning participants may end up purchasing shares worth less than their savings.
Limited Savings Cap: The £500 monthly contribution limit restricts the maximum investment potential.
Early Withdrawal Restrictions: Exiting the scheme early may result in forfeiture of the share option and associated tax benefits.
Concentration Risk: Investing heavily in employer shares may increase financial risk, especially if the company performs poorly.
Administrative Burden: Transferring shares to an ISA or pension requires adherence to strict deadlines and limits
Practical Considerations
Eligibility: SAYE schemes are open to all employees, with participation typically subject to the employer’s criteria.
Bonus Rates: Historically, SAYE schemes offered bonuses, but these have been less common in recent years due to low interest rates. Recent updates from HMRC reflect changes in these rates tied to the Bank of England’s rate adjustments
Employer-Specific Rules: Employers may tailor their SAYE schemes, so it’s important for employees to understand the terms of their specific arrangement.
Conclusion
SAYE schemes offer a compelling blend of savings discipline, tax advantages, and investment potential, making them a popular choice for employees seeking to build wealth. The added flexibility of transferring shares into an ISA or pension further enhances their appeal by mitigating tax liabilities. However, like any investment, SAYE carries risks, and participants should weigh these against the benefits, considering their financial goals and circumstances. Consulting a financial adviser can help maximise the value of a SAYE scheme while ensuring compliance with all tax rules and deadlines.
For detailed guidance and the latest updates, visit Gov.uk website at https://www.gov.uk/tax-employee-share-schemes/save-as-you-earn-saye or consult your employer for scheme-specific details.