HMRC have brought into effect their updates to the mechanism used to calculate Save-As-You-Earn (SAYE) option scheme bonus and interest rates. These updates have resulted in the re-introduction of SAYE bonus rates and early leaver interest for the first time in over ten years!
HMRC now calculate the bonus and interest rates by reference to the Bank of England base rate and this takes effect for all invitations made on or after 18 August 2023. The new method is aimed at simplifying the process for both HMRC and those operating SAYE savings arrangements.
An SAYE option scheme (also known as a sharesave scheme) is a type of all-employee tax-advantaged employee share scheme, typically used by listed companies. The scheme is comprised of a ‘savings contract’ and a corresponding share option.
Under the scheme, qualifying employees participating in the scheme make monthly contributions of up to £500 per month from their pay under the savings contract for a period of either three or five years. At the end of this period, the accumulated savings may be used to exercise the linked SAYE option to acquire shares in the grantor company. The option will often have been granted with an exercise price at a discount to the market value of the shares at grant (which can be up to a 20% discount).
Under the SAYE rules, the employee’s accumulated proceeds may include a tax-free bonus or, if the participant withdraws their savings early (after making twelve monthly contributions), tax-free interest. The method previously used by HMRC to determine such amounts was complex and, until recently, the relevant rates were set at a level which resulted in no bonus or interest being due.
The new mechanism
First announced on 26 May 2023, and taking effect for invitations made on or after 18 August 2023, the new mechanism links the bonus and interest rates to the Bank of England base rate. If the base rate changes, the bonus and interest rates will be adjusted in line with the amended base rate. If such a change occurs, HMRC will calculate the new rates in line with their new guidance and they will take effect on the 15th day after the base rate is updated. HMRC have thankfully confirmed that the new mechanism cannot result in the rate for bonus and interest falling below 0%.
The big news is that the new mechanism now allows, for the first time since 1 August 2012, tax-free bonuses or early leaver interest to be payable on SAYE savings contracts.
This is good news for those participating in future SAYE option schemes as it will allow them to receive additional tax-free proceeds at the end of their savings period, making these schemes even more attractive to employees. The current rates (applying for all invitations made on or after 18 August 2023) provides for a bonus equal to 1.1x (for 3-year savings contracts) or 3.2x (for 5-year savings contracts) the employee’s monthly savings contribution and an early leaver interest rate of 1.42%. By way of example, at the current rates an employee with a 5-year savings contract contributing £100 a month would receive a bonus at the end of their savings contract of £320.
It's worth noting that the level of bonus or early leaver interest to be paid to SAYE participants is fixed at the start of the savings contract and, once fixed, is unaffected by subsequent adjustments in the rates. However, HMRC have the power to determine, each time a rate change takes effect, whether the old rates will apply to existing invitations issued before the rate change took effect (but which have not yet resulted in a savings contract being entered into). Typically, HMRC will allow applications to be accepted based on the old bonus rates up to 30 days after the rate change takes effect.
It’s also been confirmed that any saving contract will be terminated unless its starting date is within three months of the date of a new bonus rate applying. This will need to be kept in mind when determining the timeline for circulating SAYE invitations.
Finally, we note that companies are required when issuing invitations to specify whether any bonus payable is to be included for the purposes of determining the number of shares that can be acquired under the SAYE option. Therefore, companies may now seek to make their SAYE options more attractive to their employees by allowing the bonus to be taken into account in the share calculation.
If you would like to discuss this development, please contact Kathy Granby, Matthew Rowbotham or Michael Birchall.
This is good news for those participating in future SAYE option schemes as it will allow them to receive additional tax-free proceeds at the end of their savings period, making these schemes even more attractive to employees