Which employee incentive plan best suits your business – SIP or SAYE? Part 2
In part one of this article looking at the difference between Share Incentive Plans (SIP) and Save As You Earn (SAYE) plans, you will have read that the government is currently considering changes to these employee share plans.
There is evidence to suggest simplifying the plans, aligning the savings periods of the two schemes and increasing the savings limits, which have not changed in some time, may help meet their original goal, to deliver high employee engagement, a strong ownership culture and, ultimately, stronger productivity and greater resilience for companies.
Now we’ll look at the plans in more detail and what they can deliver for a business like yours.
How do SAYE and SIP plans work?
SAYE: Share options and savings
An SAYE plan allows employees to save up over time to buy shares in the business for which they work. The company grants an option to participants at a price fixed at the time the option is granted. This price is typically the value of the shares less a discount of up to 20% on the market value of the shares at the time.
Employees can save between £5 and £500 per month from their salary into a special account, usually over a three or a five-year period. The account must be operated by an authorised savings provider such as a bank or building society.
At the end of the savings period, employees can choose to exercise their options and buy shares at the price fixed at the start or they can simply take the savings. If they choose to exercise their options, there is no IT or NICs charge at that time. If the shares are sold in the future, capital gains tax (CGT) will be charged. If they decide to take the savings, they may also benefit from a tax-free bonus, depending on the length of the savings contract.
The big advantage of SAYE, therefore, is that there is no financial risk to the participants – if the share value goes down during the savings period, the employee will still be able to take their savings and they don’t have to purchase the shares.
SIP: direct share ownership and zero tax charges
While an SAYE offers share options, with the opportunity to acquire shares at the end of the savings period, a SIP allows participants to acquire shares directly. That could mean that employees who join a SIP can receive dividends on their shares if the company pays a dividend.
SIP also offers the potential of a zero-tax rate for participants – no income tax, no NICs and no CGT – provided that the shares are held for at least five years by the employee.
The SIP doesn’t include a savings contract, but participants will sign an agreement. It does allow huge flexibility. Employees can be given shares free, and without any tax charge; they can buy shares out of pre-tax salary; or they can even be offered shares on a ‘buy one get two free’ basis. The type of offering will depend on what the company decides.
Although there is no savings contract, SIP allows employees to set aside a certain amount of their salary each month to buy shares, which can make the plan more affordable.
The SIP requires a separate trust which holds shares on behalf of employees and companies often make use of a professional firm to operate this for them.
How employees can get shares under SAYE and SIP
The SAYE is a share option plan. An option is a promise to the employee that they can buy a share in the future but at a price fixed at an earlier date. The employee only becomes a shareholder when they exercise their option, using their savings to buy the shares.
A SIP offers a range of ways for employees to get shares:
Partnership shares – Employees buy these out of their salary before tax. The maximum amount allowed per employee is £1,800 per tax year or 10% of their salary, whichever is the lower.
Free shares – These are gifted to employees. The maximum allowed is £3,600 per tax year.
Matching shares – When an employee chooses to buy partnership shares, the business can give them up to two matching shares for each share purchased.
Dividend shares – Cash dividends on the existing SIP shares can be converted into more shares tax free.
Unlike the SAYE, the SIP delivers direct share ownership for employees which means they can receive dividend payments if the company chooses to pay a dividend.
Who qualifies?
All employees and full-time directors must be invited to join in an SAYE scheme. However, it’s possible to include a qualifying period of up to five years (ending with the date of option grant).
SAYE options must be granted on “similar terms”. This does not mean all participants have to be granted the same number of options as the offer can be varied by reference to remuneration, length of service or similar factors (such as hours worked).
When implementing a SIP you can also specify a minimum period of employment. The qualifying period varies, depending on the type of shares being used, but generally speaking the longest qualifying period is18 months ending on the date on which the share award is made, or when money is deducted to buy shares.
Again, all employees who meet the criteria must be invited to join the plan on the same terms.
Hopefully, having finished part two of our article comparing SAYE and SIP you should better understand how the plans work, how employees can get shares and who qualifies. In part three, you will read how each plan is treated for tax and the advantages offered by each plan.
Once you’ve read the whole article, you should be in a better position to decide which is right for you, your people and your business, but remember, we’re only a phone call away if you need a little expert advice to help start your employee ownership journey.
