If you’re thinking about giving your employees a share in your business, there are a number of attractive incentive arrangements available. Some have tax advantages that make them an even better deal, and these include the Save As You Earn (SAYE) scheme and Share Incentive Plans (SIP).
In this article, we take a look at the SAYE and SIP schemes, the tax benefits available, and what it takes to set one up, helping you to weigh up your options and decide which is the best fit for your team and your business.
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Save as you earn
How does it work?
Under SAYE, you can grant your employees and directors options to buy shares at a price fixed at the time you set up the scheme. This is usually the value of the shares, less a discount of up to 20%. The scheme will normally last between three and five years.
Your staff will pay up to £500 per month from their salary into a special interest-bearing account that they’ll use to buy the shares if they choose to do so. This fund is guaranteed under the financial compensation scheme run by the government.
Who qualifies?
If you want, you can specify that only employees with a minimum period of employment can qualify, and you must allow all those that satisfy that condition to join, on the same terms.
Exercising the option
When the time comes to exercise the option, your employee can either choose to buy shares at the agreed price or withdraw their money plus interest (if any), tax-free. If the employee leaves before the minimum time period, their option will lapse unless they are a ‘good leaver’ – they’ve left because they’ve retired, are made redundant, have become disabled or injured, or the company has been taken over. They must exercise the option within six months of leaving. If they die, their estate can exercise the option within 12 months.
What about tax?
Employees will pay capital gains tax on any gain they make on the shares when they sell them. The base price for calculating CGT is the market price when exercised. No income tax or national insurance contributions are due when the options are exercised.
Share incentive plans
How does it work?
Under a SIP, you can give shares to employees (or allow them to buy shares), and these are then held in a special trust.
Who qualifies?
You can specify a minimum period of employment of up to 18 months, and all qualifying employees must be invited to join, on the same terms. You can choose to award free shares to certain employees only, depending on how long they’ve worked, and whether they’re full or part-time.
Types of shares awarded
There are four different types of shares that can be awarded under a share incentive plan:
- Partnership shares - that employees buy out of their salary before tax. The maximum amount allowed is £1,800 per tax year or 10% of their salary, whichever is lower.
- Free shares - that are given to employees. The maximum allowed is £3,600 per tax year. You can link these to performance.
- Matching shares - you can give up to two matching shares for every partnership share the employee buys.
- Dividend shares - where cash dividends on the existing SIP shares are converted into more shares, tax free. These must be held in the trust for three years, and any dividends that aren’t reinvested are taxable.
What about tax?
There’s no income tax or NIC due when you award the SIP shares. If they’re taken out of the plan before three years has elapsed, employees will need to pay income tax and national insurance on them. If they keep them in the plan for five years (three for dividend shares), no tax or NICs are payable. The shares can be sold within the plan with no capital gains tax payable. Any shares taken out of the plan and later sold will be liable to CGT.
Leavers will have to take their shares out of the plan. Good leavers won’t have to pay tax or NICs.
SAYE vs SIP
| Save As You Earn | Share Incentive Plans | |
| How it works | Employees are given an option to buy shares after a certain period and pay for them out of their post-tax income over time. | Employees are given or can buy a certain number of shares in their employer and these are held in a trust. |
| Tax implications | No income tax or NICs on any increase in value when share options are exercised. | No tax or NIC on shares that are bought by or given to employees. No CGT on any increase in value. |
| Employee eligibility | Must be offered to all employees. | All employees must be given the chance to participate unless free shares. |
| Option period | Option period must be at least three years. | Shares must be held for at least five years. |
| Share price | Share price can be up to 20% lower than the market value when the option is exercised. | Certain ceilings apply in terms of the value of shares awarded or bought each year. |
Advantages of Save As You Earn
The advantages of an SAYE scheme are:
- These are a risk-free way for employees to save, and to benefit if the shares increase in value. If they haven’t increased, the employee doesn’t need to exercise their option.
- You can offer up to a 20% discount on the market value of the shares when you grant them.
- You can use the scheme to motivate employees and incentivise them to help you grow the company.
- You can use a SAYE scheme to attract new recruits.
- No income tax is payable when the option is granted, and any interest is tax free.
- No tax liability when the option is exercised if this is three years or more after the date of the grant.
- The company can make a corporation tax deduction when the options are exercised.
Advantages of a Share Incentive Plan
The advantages of a SIP are:
- The cost to you of funding the free and matching shares is tax deductible.
- The contribution made by employees is pre-tax.
- If you award free shares, you can make these contingent on good performance.
- There’s a tax advantage for employees who keep shares in the plan for five years as there will be no income tax or NIC liability.
- You can use the scheme to motivate employees and incentivise them to help you grow the company.
- You can use a SIP scheme to attract new recruits.
How to set up a SAYE or SIP scheme
If you want to set up a SAYE or SIP, you should take expert legal advice from an experienced employee incentive solicitor. Your company may need to qualify under the scheme, and you’ll need to certify this to HMRC, and register the scheme with them by 6 July after the end of the tax year in which it’s set up.
You may also need to amend your Articles of Association and get the consent of shareholders if you have a shareholders’ agreement in place. For a SIP, you’ll need a trust deed, and for both types of scheme you’ll need to plan rules and guides to help employees decide whether to join.
