Save As You Earn (SAYE) share schemes — commonly called Sharesave schemes — are a popular way for employees to save and invest in their company’s shares. They offer a great opportunity to benefit from growth in the company’s value, as well as being subject to beneficial tax treatment. However, it is important to identify whether tax is due when the shares are sold, and if so how to calculate the liability and what options are available to mitigate this.
According to government statistics 350,000 UK individuals were granted share options as part of SAYE share schemes in the year to April 2023, with a total value of just under £2bn. The schemes allow you to buy shares with your savings for a fixed price (the option price) at the end of a fixed period of 3 or 5 years. The option price is determined at outset and can be discounted by up to 20% of the market value of the shares at the start of the scheme.
You can save up to £500 a month under the scheme. At the end of your savings contract (3 or 5 years) you can either take your savings back (some schemes also add interest) or use the savings to purchase shares at the option price.
Key benefits of these schemes are:
- A discount against the market value of the shares at outset offering an immediate potential benefit and the possibility of share price rises over the term of the scheme
- Relatively risk free – you can choose to take back your savings at the end of the scheme, when you’ll know whether your options are above or below the company’s share price
- No income tax due when you exercise the option to buy the shares
There is however a potential CGT (Capital Gains Tax) liability when the shares are sold, so we’ll next look at how to determine this, before looking at some options to reduce or eliminate the tax liability.
Calculating CGT on SAYE Shares
When you sell shares acquired through a SAYE scheme, the gain is calculated as the difference between the sale proceeds and the price you paid for the shares (the option exercise price). You can calculate this using the following steps:
- Calculate the Gain: Subtract the option exercise price (the price you paid to acquire the shares under the SAYE scheme) from the sale price to determine the gain. This will give you amount you’ll receive when you sell the shares. You can keep the shares, or if you do decide to sell them, you can dispose of them over a number of tax years.
- Apply the CGT Annual Exemption: For the tax year 2024/2025, the CGT annual exemption is £3,000. If your total gains for the year are below this amount, you won’t have to pay any CGT. The annual exemption has reduced significantly in recent years and is less than a quarter of the limit in the 2022/23 tax year.
- Calculate the Tax: If your gains exceed the annual exemption, unless you use one of the options outlined below, you will need to pay CGT on the excess amount. The CGT rate is 18% for basic rate taxpayers and 24% for higher rate taxpayers (these rates were increased immediately following the November budget).
Example:
The example below is based on no bonus being paid on the savings, assumes the individual is a higher/additional rate taxpayer, they save £500 per month over 5 years, and have full CGT allowance available.
|
ABC shares |
|
|
Share price in March 2020 |
£1.00 |
|
Option exercise price (discount of 20%) |
£0.80 |
|
Share price in March 2025 |
£1.75 |
|
Savings per month |
£500 |
|
Total savings over course of scheme |
£30,000 |
|
Number of shares purchased (£30,000/0.8 (option exercise price)) |
37,500 |
|
Cost of shares (option exercise price x number of shares) |
£30,000 |
|
Market value of shares when sold (37,500 x £1.75) |
£65,625 |
|
Profit/gain (point 3) |
£35,625 |
|
CGT Annual Exemption |
£3,000 |
|
Profit/gain subject to tax at 24% |
£32,625 |
|
CGT Due (24% of £32,625) |
£7,830 |
Transferring to ISAs, Pensions or using spousal exemptions
To avoid paying some or all of the CGT on SAYE shares, you could consider:
- Transferring the shares to an ISA or pension within 90 days of maturity – please note this must be carried out subject to a number of conditions and in conjunction with your ISA/Pension provider.
- Selling over a number of tax years so that more of the gains fall within your Annual Exempt Amount (£3,000) for CGT purposes.
- Transferring some or all of the shares to your spouse, and using their Annual Exempt Amount for CGT purposes, if they haven’t used their allowance. They will use your option exercise price when determining any CGT payable.
Transferring to an ISA:
- You can transfer up to £20,000 of SAYE shares into a stocks and shares ISA each tax year. Not all ISA providers will be able to offer this, so you’ll need to check with your ISA provider.
- The transfer must be completed within 90 days of the shares maturing. If the 90 day maturity window covers two tax years you could potentially make use of 2 annual allowances.
- Contact your ISA provider to arrange the transfer. You may need to provide a 'Letter of Appropriation' from your SAYE scheme administrator456.
Transferring to a Pension:
- You can transfer SAYE shares directly to a pension scheme, such as a Self-Invested Personal Pension (SIPP), but the provider must be able to hold the shares and agree to the transfer.
- The transfer must be completed within 90 days of the shares maturing.
- Contact your pension provider to arrange the transfer. Ensure that the shares are transferred directly from the SAYE scheme to the pension to avoid triggering a CGT liability.
- You may qualify for income tax relief on the value of the contribution.
In the interest of keeping this concise, we will not explore the limits on annual pension contributions, which can be a complex area. If you are interested in more information, please get in touch.
Should you consider keeping the shares as an investment, it is wise to view them not in isolation but with the consideration of your other investments. If the SAYE shares represent a significant proportion of your investment portfolio, then you should consider the increased stock specific risk that comes with concentrated positions. Not forgetting that if your employer company has difficulties, it may not just be your investments at risk but your income too.
While a more diversified portfolio would still carry some market risk, it would be less. Investing across different asset classes, sectors and geographic regions increases the diversification of your portfolio, helping to better insulate it from steep declines in one specific area.
SAYE share schemes can be hugely beneficial as a way to build wealth, but it is important to be clear on the potential tax liability, and ways to mitigate this, in order to make the most of all the opportunity.
ISA investors do not pay any personal tax on income or gains, but ISAs may pay unrecoverable tax on income from stocks and shares received by the ISA managers. Tax treatment varies according to individual circumstances and is subject to change. Stocks and Shares ISAs invest in Corporate bonds; stocks and shares and other assets that fluctuate in value.
References:
1: Employee Share Scheme statistics - GOV.UK