Save As You Earn (SAYE) is a tax-advantaged employee share scheme that enables employees to save directly from their wages, with the option to buy shares in their employer company at the end of the savings contract (usually three or five years).
The purpose of SAYE is to give employees at all levels an opportunity to participate in the success of the companies they work for. It is a popular scheme that provides several benefits to both employees and employers.
We discuss the key features and benefits of the SAYE share scheme below, which should help you to decide if it’s right for your company.
What is a Save As You Earn share scheme?
Commonly known as a sharesave scheme or an employee share ownership scheme, Save As You Earn (SAYE) lets employees save a regular sum of money directly through payroll over a period of three or five years, then use the savings to purchase shares in their employer company.
At the end of the scheme, employees also have the option to take the full amount of their savings back if they decide not to buy shares. For example, if the share price falls below the price that was offered at the start of the scheme, or if the employee simply wishes to use their savings for something else.
Key features of the SAYE scheme
- Government-backed and set up by employers
- Can be set up by public limited companies (PLCs) listed on a stock exchange, or companies owned by PLCs that are listed on a stock exchange
- Run for a period of either three or five years
- Employees can save any fixed amount of money between £5 and £500 each month (or the weekly equivalent, if they are paid per week)
- The share option price at which employees can buy shares at the end of the scheme is set at the start of the savings period
- Employers can discount shares by up to 20% below market value
- Monthly contributions are deducted through payroll from employees’ post-tax wages
- Shares available through SAYE must be ordinary shares, non-redeemable, and fully paid up
- They are all-employee schemes, which means that all employees must be invited to participate after a qualifying period of service – this is usually five years of employment, but some companies may choose to offer it to those with less service
According to the Office for National Statistics (ONS), Save As You Earn schemes are the most popular of all employee share incentive schemes in the UK.
What are the advantages of SAYE share schemes?
Save As You Earn share schemes offer a number of advantages to both employees and employers:
The main benefits to employees include:
- Risk-free saving – There is no risk to employees when participating in a SAYE scheme. Their money is protected and they are under no obligation to buy shares at the end of the scheme. They can get their savings back in full if they decide not to exercise their share options.
- Discounted share options – Employees are given share options at discounted prices of up to 20% below market value.
- Tax-advantaged savings – No Income Tax or employee National Insurance contributions are payable on any profit they make upon exercising their options at the end of the scheme, or earlier if the employee leaves under specified ‘good leaver’ circumstances.
- Makes saving easier – Since savings are taken directly from employees’ wages, the money never reaches their bank account, so it makes it easier for them to save.
- Opportunity to enjoy company profits – Whilst rapid growth in share price is rare in many companies over the length of a share scheme, employees can still make a decent profit on their discounted investments. It’s not unheard of for employees to double their money.
- Flexibility – At the end of the savings period, employees can choose what to do with the money they have saved. They can take the full amount back and not buy shares, use the money to buy the shares and then sell some or all of them in the same transaction, or buy the shares and keep them for as long as they want.
If an employee decides to sell their shares, either immediately after exercising their options or at a later date, any profit they make will be subject to Capital Gains Tax, but this will most likely be covered by their annual CGT allowance.
Moreover, employees can avoid future CGT by transferring their shares into an ISA within 90 days of purchasing, or a self-invested personal pension (SIPP), immediately upon purchasing.
For employers, the main benefits include:
- Incentivising employees – SAYE aligns the interests of employees at all levels with those of the company, motivating them to be more engaged and productive, and contribute to the growth and long-term success of the business.
- Staff retention – SAYE schemes have a minimum service requirement of up to five years of employment. This encourages staff loyalty and retention, which is always good for business.
- Attracting new talent – Aside from retaining employees, one of the biggest keys to success is attracting the best talent in the first place. Competition is high in many industries, so offering a SAYE scheme can make your company more attractive to prospective employees.
- Improving relations – Employees often feel far removed from their employer company’s shareholders and board of directors. Enabling them to own part of the business and participate in its success can open up communication and improve relations between management and employees.
- Boosting remuneration – Where companies are unable to pay high salaries or bonuses, offering a Save As You Earn scheme is an effective way to compensate for this, making the business an attractive choice of employers whilst minimising pressure on cashflow.
- Tax benefits – No employer’s National Insurance contributions are due when employees exercise their options. Additionally, the costs that the company incurs in setting up a SAYE scheme are allowable business expenses for Corporation Tax.
Can all employees participate in a SAYE scheme?
Save As You Earn is an all-employee scheme, so it must be made available on similar terms to all employees and company directors who are resident in the UK for tax purposes, and have been with the company for a specified period of time.
The qualifying period of service can be any length of time up to five years. Some companies opt for five years to encourage and reward greater loyalty, whilst others make their SAYE scheme available after the completion of a probation period, or immediately upon employment. It’s entirely up to the company.
Participating in an SAYE scheme is completely voluntary, so employees are under no obligation to enter into a savings contract or exercise their share options at the end of the scheme.
How to set up a Save As You Earn scheme
Employers can set up employee share schemes, including Save As You Earn, through banks, building societies, and share administrators.
The company must register the share scheme with HMRC by 6 July after the tax year in which it was established. You can do this by following these steps:
- signing into the company’s HMRC PAYE Online Service for employers
- selecting ‘Add a tax, duty or scheme now’
- selecting ‘Employers or intermediaries, for example, PAYE for employers or CIS’
- choosing ‘Employment related securities (ERS)’
Once you have added the ERS service, you can register the scheme by:
- selecting ‘ARS Online Service’
- choosing ‘Register a scheme or arrangement’.
- choosing the scheme type that you want to register
- completing the self certification declaration
- re-entering the sign-in details to complete the registration
HMRC will issue your company with a scheme reference number within approximately 7 days of registering. You can view the scheme’s information in your company’s HMRC online account.
The company must file an ERS return for the scheme on an annual basis, until it ceases (i.e. after three or five years). Each return is due by 6 July after the end of the tax year.
If you are interested in setting up a Save As You Earn scheme or any other type of employee share scheme, you should speak to your company’s legal team or a corporate solicitor for professional advice and guidance.
Thanks for reading
Providing employee share schemes, such as Save As You Earn, is an effective way to incentivise and reward staff in a tax-efficient way, whilst attracting new talent and encouraging employee retention.
We hope that this post has given you a little insight into how the SAYE scheme works, and the many benefits it can offer to your business and employees.
If you have any questions or feedback about this post, please leave a comment below or get in touch with our company formation team.