Anticipated bonus rate change triggers SAYE plans review

Employers are being urged to consider whether their ‘save-as-you-earn’ - SAYE - arrangements are fit for purpose following the re-introduction of a tax-free bonus on savings and the publication by the Revenue of new guidance on how the bonus rate will be calculated for this particular scheme. The Revenue’s plans are set out in their latest ERS Bulletin, number 51.

The share plans team cover this in their Out-Law article: ‘Review SAYE arrangements following HMRC bonus rates guidance, say experts’. They explain how the bonus rate applicable to an SAYE savings contract is fixed by HMRC and is set when the SAYE invitation is issued, yet due to very low interest rates in recent years, no bonus has been payable on SAYE savings contracts since the end of 2014. However, that is set to change.

For SAYE invitations issued on or after 18 August 2023, the bonus rate that is payable will be determined in accordance with a new calculation methodology determined by HMRC. HMRC has published new detailed guidance explaining how the rate will be calculated. SAYE invitations issued before 18 August 2023 will be unaffected by the changes. For those invitations, the existing 0% bonus rate will apply. Lynette Jacobs says: “The impact of the application of a bonus rate should be discussed with finance and company secretarial colleagues.”

So, what would those discussions cover, exactly? Earlier Lynette joined me by video-link from Manchester and I put that to her:
Lynette Jacobs: “Yes, so the question for the finance team to consider is that if options are now going to be granted over a larger number of shares because the bonus that the participants will receive is going to be applied in calculating the number of options shares, that will mean two things, first dilution. So, where options are going to be satisfied either by issuing new shares, or by transferring Treasury shares to the participants, then those shares count towards the dilution limits that listed companies will have in their plans, typically 10% in 10 years insofar as it relates to your share save plan. Secondly, there is an accounting cost for granting share save options and, obviously, the more options that are granted, the greater the accounting costs. So those will be points to raise with your finance team.”

Joe Glavina: “In your article you say there’s an important communications piece for HR here, putting all this to the participants”

Lynette Jacobs: “Yes, so there are two points on that. So, first of all, yes, obviously any communications that relate to share save invitations in respect of which a bonus will now apply to those options, the wording needs to be included about that, and the effect, and how that how that works and, as for any employee communication, that needs to be clearly worded and clearly explained so that employees understand how it works. At the same time, and as we've referred to in the article, and we have referred to previously, the annual exemption for capital gains tax came down on 6 April this year from the previous £12,300 to now £6,000 and then on 6 April next year it's going down again to £3,000. This can have an impact where employees have share save options, and when they exercise them they make a gain because whereas, previously, obviously some employees would be really lucky but most gains would have come within that £12,300 annual exemption and also with the possibility for the employee to transfer some of the shares that they had acquired, or exercise the option to either a spouse or civil partner, so as to have double that annual exemption available. With it going down to £6,000 now and to £3,000 next year, there's clearly the potential that if the share prices have gone up that people will have a capital gains tax liability in respect of the options, because when they come to sell the shares, they'll be making a gain that's in excess of that annual allowance. If that's the case, the employee, who may not otherwise be used to filling in a self-assessment tax return would need to do that. although there is also a particular online CGT return that individuals can do which avoids the need for them to then have to start filling in a whole self-assessment return. But yes, so that is something that's important, especially because I know that in respect to a number of companies where share save options were granted in 2020, 3 years ago, because most share save options are over three year periods now, that was during COVID and so share prices in many companies were depressed at that point and if the option was granted, and a 20% discount applied to that share price then, and if the share price has gone up quite a lot since then, some employees will be making a sizable gain this year and if they come to sell the shares they'll have the CGT to think about.”

Joe Glavina: “Finally, Lynette, on a positive note, this development does seem to be a good news story for HR to be putting out?” 

Lynette Jacobs: “Absolutely, Joe, yes, for a number of reasons. First of all, because with the interest rates having been around for quite a while now, but there was no bonus so effectively interest payable on monies being saved by employees in share save contracts and with the cost of living crisis, if an employee does have some spare money and wants to invest it, although they would be receiving an option with potentially a 20% discount to the share price at the time it's granted, if they had a choice of saving £50 a month either for their share save contract or alternatively putting it into a bank account that would give some interest, they may well have sort of struggled to make the decision as to whether to participate in the share save. So if they’ve now got the opportunity to be granted an option at a discount of up to 20% of current market price of the shares and on which they will be getting, effectively, interest, that makes it a better and more likely choice to go into share save. Secondly, for the company it just makes it a good news story because your employees can participate and, all being well, if your share price is going to at least get up to the price it was at the date pf grant, and hopefully more, your employees will then be able to exercise their option at the end of the three year savings period which most companies now operate. There are things to think about. You'll need to speak to your savings operator, but the savings operator will be really geared up for this, as far as I'm aware. They have dealt with bonuses in the past and their systems are set up to operate them so it’s just a matter of thinking about it. A lot of people won't have had experience of share save and bonus rates previously but it's like anything - once you start doing it, you'll get used to it and it'll just become a way of operating share save again.”

The share team’s article covers this development in more detail if you’re interested. It’s called: ‘Review SAYE arrangements following HMRC bonus rates guidance, say experts’ and is available from the Outlaw website. We’ve put a link to it in the transcript of this programme. 

LINKS
- Link to Out-Law article: ‘Review SAYE arrangements following HMRC bonus rates guidance, say experts’
- Link to ERS Bulletin 51