Save As You Earn share plans: are you ready for change?
Capital Gains Tax changes from 6 April 2023 could affect how your employees benefit from SAYE options – here’s what you need to know.
CGT changes and Save As You Earn
Save As You Earn (SAYE or sharesave) plans are a key part of many larger companies’ employee value propositions; around 380,000 UK employees were granted SAYE share options in 2020/21. Income tax relief on the acquisition of shares at a discounted price, and the potential to shelter disposals from Capital Gains Tax (CGT) with the annual exemption, mean SAYE has let many employees participate, tax-free, in the shareholder value they collectively create. However, the Chancellor announced in the Autumn Statement on 17 November 2022, that the CGT annual exempt amount will reduce to £6,000 from April 2023, then to £3,000 from April 2024. This has the potential to reduce the appeal of SAYE options to employees and creates administrative barriers to participation, in the form of self-assessment obligations, for more employees. To assist companies that operate or might introduce an SAYE plan, this article highlights steps employers can consider to ensure SAYE options continue to deliver for their workforce and their business.
How do SAYE plans work?
Under an SAYE plan, participants are granted options over shares in their employer (or its parent company) and enter into a three or five year savings contract. The number of shares an employee can acquire is based on their total savings and the option exercise price (which can be set at a discount of up to 20 percent of the underlying shares’ market value on the date of grant).
At the end of the savings contract, employees can either use their savings and any tax-free interest (or ‘bonus’ – see below) to buy the shares under option, or retain the cash (e.g., if the share value falls below the option exercise price). No income tax, employee’s or employer’s NIC, or employer’s Apprenticeship Levy arises on the exercise of SAYE options on or after the third anniversary of their grant date (or, on earlier exercises in certain take over and ‘good leaver’ circumstances).
When SAYE plan shares are sold, the employee’s CGT liability is calculated on the difference between the disposal proceeds and the price paid for the shares (the option exercise price), which is the ‘gain in value’, less the CGT annual exemption available.
What’s the bonus rate for SAYE savings contracts?
The bonus rate for SAYE has been set at zero since 2014, but a revision to the bonus rate mechanism calculation is due. We understand that HM Treasury will publish further information about this soon after the 15 March 2023 Spring Statement. Without a positive bonus rate incentive, the savings contract only provides upside potential if shares are acquired.
How will CGT changes affect SAYE optionholders?
Based on the CGT annual exemption for 2022/23, employees who qualify for income tax relief on exercise of their options, and who have no other taxable capital gains, can realise a profit of up to £12,300 on a sale of SAYE shares before paying any tax. The CGT annual exemption was expected to remain at £12,300 until 5 April 2026, but will now reduce to £6,000 for 2023/24, with a further reduction to £3,000 for 2024/25.
On and after 6 April 2023, employees whose taxable capital gains (the taxable profit when they sell their shares in the company) exceed the new lower annual exemptions will therefore pay more tax on the sale of SAYE shares than they would in comparable circumstances in prior years, potentially reducing the perceived benefit of participating in an SAYE plan. Additionally, as individuals must calculate, report, and pay any CGT due themselves, some affected employees will be required to deal directly with HMRC and the complexities of self-assessment for the first time.
What should employers consider?
Larger employers wanting to provide more inclusive, all-employee, value creation sharing awards often turn to SAYE in the first instance (including US in-bounds seeking to replicate their US Employee Stock Purchase Plan incentive this side of the pond). SAYE options will continue to offer considerable tax advantages to participants who qualify for income tax relief on exercise. For example, employees with total taxable income and capital gains of less than the UK higher rate threshold (currently £50,270), should pay CGT on a disposal of SAYE shares at 10 percent of their taxable capital gain, compared with combined income tax and employee’s NIC at 32 percent (or, potentially, more for Scottish taxpayers) on the acquisition of shares under a non-tax advantaged plan.
SAYE options will also continue to offer NIC and Apprenticeship Levy savings to employers.
However, employers should now consider how to:
- Minimise the impact that new or increased tax charges for participants might have on the SAYE plan’s effectiveness as part of their employee reward and incentives package;
- Effectively manage communications to all employees (what will your strategy be to ensure that employees understand what this change could mean for them and how they’ll continue to benefit from SAYE?);
- Update plan FAQ documents and refresh employee communications (now for this CGT change and also, potentially, later this year when the SAYE bonus rate review outcome is published); and
- Support employees with unfamiliar CGT liabilities who might look to the employer’s payroll, reward, and HR teams or plan administrator for assistance.
This could include communicating the impact of the CGT changes through reward platforms so employees remain clear on how they will benefit from SAYE options, and providing general guidance, or specific professional support, with calculating and reporting CGT liabilities (e.g. by ensuring employees understand when and how they could use HMRC’s CGT service, rather than register to file a self-assessment tax return).
Employers could also consider whether changes to their share plan offering could minimise employees’ potential CGT exposures. Such changes might include introducing or increasing partnership, matching, and/or free share awards under a tax-advantaged Share Incentive Plan, which can deliver CGT free disposals of shares regardless of the annual exempt amount; or facilitating the transfer of SAYE shares to employees’ stocks and shares Individual Savings Accounts, which – if done within the relevant time limit – could remove any CGT exposure completely.
Please contact the authors, or your usual KPMG contact, to talk through the CGT changes’ specific implications for your SAYE plan, and what you could do to ensure your employee share plans continue to deliver for your business and employees.