What is save as you earn (SAYE)? Employee 101

Save as you earn (SAYE) is a government-backed share scheme in the UK that empowers employees to save money directly from their pay. Also known as sharesave, SAYE schemes have a lifespan, normally three or five years in length. When the scheme comes to an end, employees then get to choose whether or not to use the amount saved to buy shares in the company at a pre-agreed price per share (which is locked in from the start of the scheme).

Enrolling in SAYE as an employee is risk-free, because you are guaranteed to receive every penny of your savings back if you choose not to convert your savings into shares. Depending on the base rate of interest at the start of the SAYE scheme, you may also be entitled to a bonus/interest at the end of the scheme.

How does SAYE work?

The employer sets and manages SAYE schemes, but enrolment is voluntary. The SAYE scheme can run for either a three or five-year period. In some cases employers offer both schemes concurrently, so employees can choose which scheme suits them best.

The maximum monthly contribution is £500. Within this limit, companies can define the level of contribution they permit. For example, a company may choose to allow contributions between £50 and £300 per month for scheme participants.

Contributions to SAYE or sharesave schemes are made automatically from an employee's post-tax pay. So if an employee was receiving £2500 per month after tax and had chosen to contribute £300 per month to the SAYE scheme at their company, they would receive £2200 and the £300 would be put into their sharesave or SAYE plan.

Example savings and returns with an SAYE scheme

What are the advantages of SAYE for public companies?

SAYE generally suits larger and later-stage businesses, as employees are purchasing shares in the business rather than share options (which are more commonly offered to employees in earlier-stage private companies). More mature businesses are often a better fit for employees considering future share purchases, given the importance of stability and predictability when it comes to important financial metrics such as revenue generation and profitability. 

As with most equity plans, SAYE is a valuable tool for attracting talent. Companies can offer discounts of up to 20% compared to the current market share price. As public company share prices are available on the stock market, employees have the power to immediately evaluate their position by using the agreed price for their SAYE contribution and weighing that against the current stock market price. 

Prospective talent may also see SAYE schemes as a great mechanism for risk-free saving. As the agreed amount is taken from employees’ pay each month, at a minimum the employee will get the amount saved back, with the opportunity to potentially gain through interest, bonuses, and shares.

Are there tax benefits for businesses running SAYE?

Yes, the costs associated with running an SAYE scheme for your employees are tax-deductible. In addition, when employees exercise their right to purchase shares at the end of the SAYE scheme, the employer normally obtains a statutory corporation tax deduction. 

Do employees earn interest or get a bonus with SAYE?

Yes. With save as you earn schemes, you can earn interest and a bonus. HMRC sets the bonus rate for completing the three or five-year term on a SAYE scheme and the interest rate applied for an early exit (which is influenced by the base rate of interest). The interest and bonus rates are locked in at the start of your plan so you can decide if the rewards meet your expectations. 

Managing tax in your SAYE

The good news is that there are some key tax advantages to SAYE for employees but of course, there are taxes to consider. Let's break it down.

The first tax advantage for employees is that the bonus or interest you earn from your SAYE / sharesave scheme is tax-free. The current early leaver rate is 1.42% (see updates here), meaning if you were to exit your scheme before the agreed period is complete, the 1.42% interest rate would be applied to the sum you had accrued. (It is important to note this is only for ‘early leavers’ who take their savings out of the scheme before the full term is completed.)

The bonus is applied at the end of the SAYE term and is calculated as a ratio of the monthly contribution. For a three-year save as you earn scheme, the bonus ratio is 1.1, and for a five-year SAYE scheme, it is 3.2. This means that if you contribute £500 per month, after three years your bonus would be £550, and after five years you would receive a bonus of £1,600.

The second advantage is that there is no tax to be paid when you decide to buy the shares. If your company’s share price increases over that time, you’ll benefit from the increase in the share price at the end of the scheme.

As an employee, how much tax will I pay?

When you decide to sell shares purchased through an SAYE scheme, capital gains tax will be due on the difference between the price you paid initially and the price at which you sell the shares. Some people would choose to do this immediately at the end of their sharesave term if the company they work for is public or there is a trigger event soon after their scheme has ended. 

The UK government states that you may not be liable for capital gains tax “if you transfer the shares to an Individual Savings Account (ISA) within 90 days of taking them out of the scheme”, or if you transfer them into a pension. 

You may also be entitled to other tax relief if you pay fees for the transaction, which would qualify and change the amount of tax you would pay overall. Read more about this, and calculate potential capital gains tax due on your purchases, online.

What is the difference between SAYE schemes and SIPs?

SAYE schemes offer several advantages for employees, but there are other forms of equity plans that employers may offer to enhance employees’ remuneration packages. Many early-stage companies in the UK incentivise employees with EMI schemes. However, only businesses with less than £30m in assets and fewer than 250 full-time employees qualify to offer EMI options. Share incentive plans (SIPs) are a popular option for larger or more mature businesses. We’ve outlined some of the key comparisons between SAYE schemes and SIPs in the table below:

Do I have to offer every employee the same SAYE plan?

Yes. SAYE schemes and SIPs need to be available for all employees. The only caveat to the rule is for free shares that companies issue through SIPs, which can be directly linked to performance. Although SAYE must be offered to all employees, the level of savings for the employee doesn’t have to be fixed: the company can choose to offer varied levels to suit a larger pool of employees, and the term can also be varied between the three and five-year plans.

Can businesses offer multiple equity plans?

It is common for businesses to offer different equity plans for different stakeholder groups. A company reaching the upper limits of its EMI plan, for instance, may wish to start a CSOP or issue growth shares for employees joining at a later stage. As companies scale, finance, legal, and people teams may need to dedicate increasing resources to managing the different share plans. 

There are significant complexities in managing multiple share plans and meeting the required reporting standards. Equity and share plan management software can save teams significant time and reduce the risk of inaccuracies leading to additional complications. With Ledgy, you can seamlessly manage and report on equity across various markets and cover all your different plan types.