United Kingdom – SAYE Employee Share Plans and Capital Gains Tax Changes

How U.K. SAYE Plans Work

Under a U.K. SAYE plan, participants are granted options over shares in their employer (or its parent company) and enter into a linked three-year or five-year savings contract. The number of shares an employee can acquire is based on their total savings (employees can save up to GBP 500 each month from post-tax salary) and the option strike price, which can be set at a discount of up to 20 percent of the share price 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 strike price). No income tax or employee’s or employer’s social security charges arise 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 shares are sold, the employee’s CGT liability is based on the difference between the disposal proceeds and the price paid for the relevant shares, less any unutilised CGT annual exemption available.

How Reductions in the CGT Annual Exemption Could Affect SAYE Option-holders

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 GBP 12,300 on a sale of SAYE shares without paying any tax.

The CGT annual exemption was expected to remain frozen until 5 April 2026,² but will now reduce to GBP 6,000 for 2023/24, and to GBP 3,000 for 2024/25 and subsequent U.K. tax years.

This means that from 6 April 2023, employees whose taxable profit when they sell SAYE shares exceeds the new lower annual exemption will pay more tax than they would in comparable circumstances in prior years. This could affect employees’ perceptions of the financial benefit of participating in an SAYE plan. Additionally, as individuals must calculate, report, and pay any CGT due themselves, some affected employees will need to deal directly with the U.K. tax authorities (HMRC) and the self-assessment personal-tax filing regime for the first time. This could raise administrative barriers to future participation in SAYE plans.

An adverse employee perception to how these changes could affect participation in an SAYE plan might reduce the benefit that employers receive from offering SAYE options as employee incentives.

General Steps Employers Can Consider

In order that SAYE options continue to deliver value to their workforces and businesses, employers that operate SAYE plans could consider how they might:

• reduce the impact that new or increased tax charges for participants might have on the plan’s effectiveness as part of their employee value proposition;
• manage communications effectively so that all employees understand what these changes might mean for them and how SAYE participation will continue to benefit them;
• update plan FAQ documents and refresh employee communications; and
•  support employees with unfamiliar CGT liabilities who might look to the employer’s payroll, reward, and HR teams or plan administrator for assistance.

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