Save As You Earn – further Capital Gains Tax changes are on the way

Capital Gains Tax changes from 6 April 2024 will impact employees with SAYE options – here’s what employers should consider

CGT changes and Save As You Earn

Save As You Earn (SAYE or sharesave) options are a popular part of many large companies’ total employee reward packages, due to the ‘risk free’ nature of the award to employees, as well as the tax/National Insurance Contribution (NIC) advantages afforded to employees and employers. However, the Capital Gains Tax (CGT) annual exempt amount – which allows many employees to sell SAYE shares entirely tax free – will fall to £3,000 from 6 April 2024. This reduction in the potential for tax free returns could reduce the appeal of SAYE options to employees, or increase administration or compliance risk for employees, as they may be required to engage directly with HMRC, potentially for the first time, to pay any CGT due. This article looks at what companies could do to make sure that their SAYE plan continues to engage and reward their workforce effectively.

How SAYE plans work

Employees who participate in an SAYE plan are granted options over shares in their employer (or its parent company) and enter into a three or five year savings contract.

When the savings contract ends, employees can choose to exercise their SAYE options and use their total savings and any tax-free interest (or ‘bonus’) to buy the underlying shares. The number of shares an employee acquires depends on the amount of their total savings and the option exercise price (which can be at a discount of up to 20 percent of the shares’ market value when the option is granted).

No income tax charges, employee’s or employer’s NIC, or Apprenticeship Levy for employers arises on the exercise of an SAYE option on or after the third anniversary of the date of grant. Income tax and social security reliefs also apply on earlier exercises in certain take over and ‘good leaver’ situations.

CGT calculations can be complex depending on an individual’s personal circumstances but, broadly, when shares acquired on the exercise of an SAYE option are sold, the employee’s capital gain for tax purposes is based on the difference between their sale proceeds and the price that they paid for their shares on acquisition (i.e. the option exercise price). That gain is subject to CGT if and to the extent it exceeds any available reliefs or allowances, the most important of which for many individuals is the CGT annual exempt amount.

Alternatively, the employee can choose not to exercise their SAYE option and, instead, retain their total cash (for example if the shares under option have fallen in value). 

How will the CGT exempt amount’s reduction affect SAYE optionholders?

The CGT annual exempt amount is currently £6,000. This means that employees who qualify for income tax relief on exercise of their SAYE options, and have no other taxable capital gains, can make a tax free profit of up to £6,000 when they sell SAYE shares. The CGT annual exempt amount reduced from £12,300 to £6,000 on 6 April 2023, and will further reduce to £3,000 from 6 April 2024.

This means that for 2024/25 and subsequent years, employees whose taxable capital gains when they sell SAYE option shares exceed the reduced annual exempt amount will pay more tax than they would in similar circumstances in earlier years.

For some employees, this could reduce the benefit they perceive in participating in an SAYE plan. As individuals must calculate, report, and pay any CGT due themselves, some employees will also be required to deal directly with HMRC for the first time.

What could employers do?

It’s important to remember that, notwithstanding the prospective reduction in the CGT annual exempt amount, SAYE options 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 capital gain after deducting the annual exempt amount and any other available reliefs, compared with combined income tax and employee’s NIC at 30 percent (or, potentially, more for Scottish taxpayers) when they acquire shares under a non-tax advantaged plan.

SAYE options also continue to offer employer’s NIC and Apprenticeship Levy advantages.

However, given the expected reduction in the CGT benefits for employees, employers should consider how best to minimise the impact that new or increased CGT charges for employees could have on the SAYE plan’s effectiveness as part of their employee value proposition by the following steps:

  • Communicate the CGT changes to employees (how will you ensure that your workforce understands what the CGT change will mean for them and what SAYE continues to offer?);
  • Update plan documents; and
  • Support employees with unfamiliar CGT liabilities who could look to their employer or plan administrator for help.

This might include providing general guidance, or specific professional support, with calculating and reporting CGT liabilities.

Employers could also consider whether changing their share plan proposition could reduce employees’ potential CGT exposures. This 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 any reduction in the annual exempt amount or helping employees to transfer SAYE shares to a stocks and shares Individual Savings Account, which – if done within the relevant time limit – could remove any CGT exposure.

Please contact the authors, or your usual KPMG in the UK contact, to talk through the CGT changes’ implications for your SAYE plan, and what you could do to ensure your employee share plans continue to deliver for your business and employees.