An Save As You Earn scheme (SAYE or ShareSave) is a UK tax-advantaged savings-related share scheme. According to Office for National Statistics UK, SAYE is the most popular among all the employee share incentive schemes available to employers.
In the US, we’ve a tax-advantaged ESPP scheme under which employees can purchase stock in their companies at a discount – often between 5-15% off the fair market value (FMV) and enjoy tax benefits. Let’s review their features before discussing SAYE in detail:
ESPP (Qualified & Non qualified)
Mainly used in
Post-tax salary ($)
Post-tax salary (£)
Typically less than 3 years
3 or 5 years
Discount on purchase price
Up to 15% (qualified)
Up to 20%
Yes (qualified); No (non-qualified)
Pay tax at purchase?
No (qualified); Yes (non-qualified)
Pay tax at sale?
Yes, but can avoid by transferring shares to pension
How does an SAYE work?
To participate in it, you need to enter into a SAYE contract (or commonly called savings contract). When the saving contract begins, employees are granted the option (i.e. the right) to buy shares in the company at a future date at a discounted purchase price (i.e. exercise price), using their accumulated savings from their salary.
The exercise price is set at not less than 80% of the market value of the shares at the date of the grant of the options.
To Begin your savings contract, you’ll
- Choose how much you want to invest: Able to save between £5 and £500 per month
- Choose how long you want to invest: Either 3 or 5 years.
- Be confirmed the stock price that you will be able to purchase (exercise) at when the scheme ends
When the 3-or-5-year contract ends, you’ll have 2 options:
- Use your savings to buy some or all of the shares. This can be further broken down into three approaches:
Buy & Sell:
Buy & Transfer
Buy & Keep
- Decide to Not Purchase (exercise) the shares and have your savings returned as a lump sum.
Benefits of an SAYE for employees
Here’re some of the advantages:
- No tax charged on the grant of the share option
- No tax charged on the exercise of the share option*
- Don’t have to pay income tax or national insurance on the difference between what you pay for the shares and what they’re worth (i.e. the discount)
- Don’t trigger CGT if you transfer the shares to – An individual savings account (ISA) within 90 days of the scheme ending – A pension immediately, directly from the scheme when it ends
*If the date of exercise is at least three years after the date of grant.
Almost Risk-free Investment:
You can simply ask for all your savings back at the end of the contract if you don’t want to do so.
The Financial Services Compensation Scheme (FSCS) can cover up to £85,000 of savings. Employees participating in SAYE schemes are protected before they purchase the shares and entitled to £85,000 guarantee in the event of the bank going bust.
In addition to being flexible to save – as little as £5 or as much as £500 per month, employees can withdraw contributions at any time before the end of the savings contract and will be entitled to their total contributions to date repaid in full.
Benefits of an SAYE for employers
Corporation Tax Deduction:
Firstly, an SAYE scheme benefits a company financially when calculating their tax liabilities.
The costs incurred in setting up an approved SAYE scheme are treated as a deduction in working out your company’s profits for corporation tax purposes.
Also, when options are exercised, you as an employer obtain a statutory corporation tax deduction for the amount of the employee’s gain.
Companies have great flexibility to decide on the level of discount given – from zero to 20% of the market value of the shares. Companies can also set a minimum service requirement for participants that can be set at a maximum of five years. Therefore, employers can choose to exclude relatively new workers.
Employee Retention and Loyalty:
The real advantages for a business though come from the sense of ownership, loyalty and accountability an SAYE scheme can give to an employee.
By committing to the scheme, an employee is much more likely to commit themselves to the company itself, both in the length of their service and the quality of that service.
Risks of an SAYE for employees
As mentioned, the financial risks of an SAYE to employees are almost non-existent because you can get back every penny you put in if you don’t want to buy the shares when the time comes.
But, there is one thing you may want to consider:
Do you remember the FSCS protection of up to £85,000 per person per bank we discussed? Once you have purchased the shares, you lose this protection. Although an SAYE is generally considered almost risk free, holding on to the shares when the contract ends is another matter.
Risks of an SAYE for employers
For the employer themselves, an SAYE scheme again has limited-to-no risks. While there are no financial risks, there is a reputational risk within your workforce if share prices drop to such a degree that it highlights bad performance and affects morale.
If a company is taken over during an SAYE scheme, then typically the employees will be designated ‘good leavers’. The new owners do, however, have the right to exercise several different options, and those options will be dependent on whether the share options are vested (already transferred to you or you have secured the right to buy shares at a certain price) or unvested (promised to you but not fully earned as of yet, for whatever reasons).
You can read more about what happens to an employee share plan in a takeover here.