Tax – Incentives and Personal Taxation

SAYE plans are a form of tax-advantaged, all-employee share option scheme under which participants can exercise their options using the proceeds of a savings contract lasting three or five years. At the end of the savings period, the savings contract can have a tax free "bonus" added to it. If an individual chooses to withdraw their savings early, they won't be eligible for a bonus but may be entitled to receive tax free interest. 

The bonus and interest rates are fixed by HMRC using a set mechanism and remain the same throughout the life of the relevant savings contract. For nearly a decade, this mechanism has meant that no bonus was payable on SAYE savings contracts. Earlier this year, HMRC announced the introduction of a new automatic mechanism for calculating SAYE bonus and interest rates which came into effect on 18 August. Under this mechanism, the bonus and interest rates are calculated by reference to the Bank of England Bank Rate (also known as the ‘base rate’). For SAYE invitations issued on or after 18 August, the bonus rates (expressed as a multiple of monthly savings) are 1.1 for a 3-year savings contract and 3.2 for a 5-year contract with the early leaver rate set at 1.42%. HMRC have said they will not formally announce future changes but will record the bonus rates, early leaver rate and effective date of any change here.

Over the summer, the UK Government launched a Call for Evidence on the two tax-advantaged all-employee plans, SAYE and SIP, to consider opportunities to simplify and improve the schemes. Changes that the Government has been asked to consider include increasing the financial limits on individual participation and reducing the vesting/holding periods for tax relief to be available.

The reduction in the annual CGT exempt amount (down to £6,000 from £12,300 on 6 April and then halved again to £3,000 from 6 April 2024 onwards) is unwelcome news for participants in UK tax-advantaged share option plans. This is because many of them have been able to use the allowance against gains realised when they sell their option shares to make participation in the plan effectively tax free. Some participants can transfer their shares to a spouse or civil partner first, to take advantage of double the allowance. The same issues arise for participants in share incentive arrangements that are not tax favoured but benefit from capital gains tax treatment.