Which all employee incentive plan best suits your business – SIP or SAYE? Part 3
In part two of this article looking at the difference between Share Incentive Plans (SIP) and Save As You Earn (SAYE) plans, you will have read how the SAYE and SIP plans work, along with the qualification criteria and how employees get shares.
Now we’ll look at the tax treatment of each plan, to help you recognise the benefits for your business.
Save As You Earn tax treatment:
SAYE options, in summary, enable participants to benefit from CGT treatment instead of income tax (IT) and National Insurance Contributions (NICs), provided that options are not exercised within three years of the date of grant.
There is no IT or NICs liability on the grant of an SAYE option, and also no liability on exercise of the option, provided that the option is exercised at least three years after the date the options were granted.
There is also an exemption from IT and NICs if the options are exercised within three years for specific reasons. These include an employee ceasing employment for “good leaver” reasons – typically, when they leave a job for reasons beyond their control, e.g., because of death, disability, retirement or a TUPE transfer. If this happens, the option must be exercised within 6 months of the date of leaving (or 12 months, in the case of death).
There may also be an exemption if the options are exercised before the three-year anniversary because the company is sold or taken over.
Employees do not have to exercise their SAYE options. Instead, they can withdraw their savings, which may include receiving a tax-free bonus.
When shares are sold, there will be a CGT charge on the gains, subject to any CGT annual exemptions. However, they will not pay CGT in certain circumstances if they transfer the shares to either an Individual Savings Account (ISA) or into a pension.
Share Incentive Plan tax treatment:
A Share Incentive Plan can deliver a zero-tax rate (no IT or NICs or CGT) to participants, provided that shares are held in the trust for a minimum of five years.
There is no IT or NICs on the award of free shares under a SIP. If participants buy shares, these are bought out of pre-tax salary.
If an employee ceases employment, the shares automatically cease to be subject to the SIP. If this happens within three years of the date the shares were awarded, there will be a clawback of the tax savings, with IT and NICs due on the value of the shares at the date they are removed from the plan.
If this happens between three and five years of the date of award, the tax charge will be due on the lower of the value of the shares at the date they ceased to subject to the plan, and the date they were originally acquired. If the shares are held for five years or more, there will be no tax charge when the shares are taken out of the plan.
Shares that are given free to employees can sometimes be forfeited, depending on the plan rules. Shares that have been bought by participants cannot be forfeited.
There are exemptions for the IT and NICs charges for employees who are “good leavers”, or if the company is sold, in the same way as the SAYE.
For as long as shares are kept in the SIP trust, no CGT applies. So, if an employee takes shares from the SIP trust, on or after the five-year maturity date, then sells them on the same day, no CGT will be owed. The shares can be held in the SIP trust for longer than the five-year period, provided the employee stays at the business, and there should be no CGT liability while they remain in the trust.
There are advantages and disadvantages with both plans, which make each more suitable for different businesses. The main differences are the flexibility offered by SIP and its ability to deliver high employee engagement and a strong ownership culture, as employees become shareholders as soon as the shares are issued and purchased, as well as the potential to pay no tax at all on the SIP shares.
Advantages of Save As You Earn
SAYE plans are a risk-free way for employees to save regularly and to benefit if the shares offered increase in value. If they haven’t increased, the employee does not need to exercise their option and purchase the shares when the time comes.
Shares are initially offered with up to 20% discount off the market value of the shares when the grant is made, which makes them a good way to motivate employees and incentivise them to help the company grow. The fact a business is operating an SAYE plan, can help retain talent and attract new employees.
From an employee perspective SAYE is risk free. At the end of the savings contract an employee does not have to use their savings to purchase the shares, they can just withdraw the cash, hopefully with a tax-free bonus.
No income tax is payable when the option is granted, and any interest on the savings is tax free. When the option is exercised, as long as it is three years or more after the date of the grant, there is no tax liability. And importantly, the business can make a corporation tax deduction when the options are exercised.
Advantages of a Share Incentive Plan
The zero-tax rate that can apply to SIP shares is very attractive, but the flexibility of the plan is also a significant advantage, as business can choose whether employees should get shares free or pay for them, or whether a mix of the two approaches is used. Once employees have been awarded shares, they can receive dividends on their shares, which is not possible under SAYE unless options have been exercised (and assuming the shares are not sold immediately).
If employees are buying SIP shares, there is evidently a financial risk, but it is mitigated by the fact that shares are bought out of pre-tax salary. The risk is reduced further if employees are also given free shares, or participate in a “matching” arrangement, whereby they can get a further two free shares for each share that they buy.
In addition, employees can save on a monthly basis to buy shares – this is called an “accumulation period”. If a business is running a 12-month savings accumulation period for Partnership Shares, the company can set the price paid to be the lower of the price at the start of saving vs the end of the savings period.
From an employee’s perspective, if they keep their shares in the plan for five years, there will be no income tax or NIC liability, while any growth in value in the shares will be sheltered from CGT. This is the aspect of the SIP designed to motivate employees and incentivise them to help grow the business, benefitting from the value added to the shares.
Knowledge that a business has a SIP scheme in place and being managed effectively, especially with a specialist adviser such as RM2, will undoubtedly attract new recruits, seeking a role in a business that values the contribution made by employees, beyond merely paying wages.
How to set up a SIP or SAYE scheme
If you believe your business will benefit from spreading ownership to include some or all of your workforce, this requires careful planning and is not something to be undertaken lightly.
Before you make any decision about the plan that might suit you, your business and your people, you should seek expert advice from share scheme specialists, such as RM2.
Our team will first help you identify the plan that is most appropriate for you, including confirming that your business and employees qualify for the share plan.
We will help you consider the details of the plan, including ensuring that all the documentation such as rules and employee guides comply with the legislation and HMRC best practice. Your Articles of Association may need to be amended and, you may need to gain the consent of your shareholders before any changes are made. You may also need to consider additional consents under any shareholders’ agreement that is in place.
For tax-advantaged plans such as SAYE and SIP, privately owned companies will need to have a valuation agreed with HMRC before you can grant options or make awards under a plan. Our team of specialists and trusted partners can help you resolve all these points.
There are additional compliance and administrative requirements for share plans. For the SIP in particular, a separate trust is required to hold shares for employees. RM2 can manage all ongoing share plan administration, including acting as SIP trustee and managing your share plan records and annual returns.
Our expert team can help design, implement and manage all your employee share plans from start to finish. If you would like to discuss the benefits of employee ownership and share plans in particular, please get in touch, so a member of our team can explain your options.
