SAYEs versus SIPs – here’s what you need to know

October 16, 2019 |



 

 

The European employee share ownership environment is as diverse as the continent itself. Across Europe, the rate of employee share ownership in the companies they work for averages 6%.  However, the UK has always stood at the forefront of this environment and has embraced employee share ownership.

Both public and private companies have reported huge benefits - they see employee share ownership as the ideal reward when it comes to employee remuneration, motivation, and retention. They also understand that ownership has a further tangible benefit in that it gives employees ‘skin in the game.’

The benefits are captured by their exponential growth, which sees nearly companies operating some form of all-employee share ownership plan. Over two million UK employees hold shares or options through their companies.

In the United Kingdom, the HM Revenue and Customs have four main approved employee share ownership plans, and the two that are most widely used are SIP and SAYE plans. As they are all-employee plans, they are offered to all qualifying employees in a company. The most recent figures show that total shares and options circulation totalled £3.7bn. In addition to this, employees received £560m in income tax relief and £360m in National Insurance contributions under these plans.

 

SAYEs at a glance 

 

SAYE (Save As You Earn) also known as ‘Sharesave’ - was introduced in the Finance Act of 1980. SAYE plans have the highest total value of options granted with approximately £2 bn in the pot.

SAYE is one of the UK’s most popular employee share plans because it is a proven method of attracting, rewarding, retaining and motivating employees. The plan gives employees the opportunity to save in an easy and secure way, and potentially profit from the success of their employing company in a tax-efficient manner.

Whilst HM Revenue and Customs outline the broad terms under which SAYE can be offered (see full details here) each company needs to decide for itself, what plan design will work best. Of course, in order to decide this it first has to understand what the company objectives are, as well as considering the demographics within its workforce.

SAYE often considered to be ‘no risk’ as the employee can always choose to take their savings out of the plan, for any reason, at any time, without penalty.  However, if they do this, they have to come out of the plan completely, therefore losing their chance to benefit from any potential gain.

 

Some decisions for the company when designing the plan include:

  • Will you offer this as a ’one off’, or will it be your intention to offer SAYE on an annual basis?
  • How much to allow employees to save; the minimum monthly amount that an employee can save is £5 per month and the maximum is £500 per month. This maximum figure is an aggregate amount across all SAYE grants
  • What savings term will you offer employees? You can offer just a 3-year term, just a 5 year term, or allow the employee to choose a 3 or a 5 year term
  • Will you offer a ‘discount’? You are allowed to offer a discount on the market price of your company’s share price at the time of inviting employees to join the plan, of up to 20%
  • What employee eligibility criteria will you apply? For instance, will you want to apply a 3 month eligibility criteria, allowing only employees that have been with your company for 3 months to join the plan?

Each employee that joins the plan will be granted an option over a certain number of company shares, which will be based on the amount of savings and the savings term that the employee has chosen. At the end of the savings period, the employee can choose to purchase the shares they were originally ‘granted’ at the start of the plan or simply take back their savings.

The price the employee pays for the shares is fixed at the start of the savings period. Employees savings are deducted from salary net of tax and NIC, and paid to an HMRC approved SAYE savings carrier, where the funds are safeguarded under EU Investor Protection. The average monthly saving increased to £126 from £118 in 2017.

                       

SIPs at a glance 

 

Initially known as the all-employee share ownership plan, the Share Incentive Plan (‘SIP’) was introduced in Finance Act 2000 largely as a replacement for Approved Profit-Sharing plans which ceased in April 2001. The SIP legislation allows companies to deploy a made-to-measure approach in terms of how plans are designed with employees able to receive one of or a combination of the following: 

  • Free Shares. Employers can give each employee free shares worth up to £3,600 each year which are free of income tax and national insurance so long as they are held in trust for 5 years.
  • Partnership Shares. Employees can use the lower of £1,800 a year or 10% of salary from gross salary to buy partnership shares. Employees enter into a partnership share agreement and choose how much they want to be deducted from their salary in agreement with the company. Shares may be bought each month or by an accumulation period which will be decided by the company.
  • Matching Shares. Employers can give free matching shares at a ratio of up to two matching shares for each partnership share bought by the employee. The same ratio must apply to all plan participants.
  • Dividend Shares. Employers can allow that any cash dividends paid on the SIP shares held in trust be reinvested to purchase further shares. The company can choose to offer dividend shares on an optional or compulsory basis. There is no limit on the value that is reinvested, and the shares are not usually forfeitable.

 

The types of Plan shares listed above can be used in various combinations, for example, free Shares only, or partnership with or without matching shares, to suit the business needs of the company. Remember, if you are thinking about a SIP for your UK employees, you will require an onshore trust. However, most share plan administrators have established onshore trusts specifically for UK SIPs

As well as being able to choose between the above types of shares when building a plan, employers can also include other optional features such as:

 

  • Eligibility criteria. Companies may list a period of up to 18-month employment before employees become eligible to participate in a SIP.
  • Performance-related awards. Companies may link the award of free shares to performance measures.
  • Companies may make employees give up some or all of their free or matching shares if they leave within three years of the award date.
  • Holding periods. Free and matching shares must stay in the plan for at least three years, and for five years to ensure the participant has no tax liability outside of Capital Gains Tax. Dividend shares need only be held for three years before becoming tax-free.

 

SAYE versus SIP - what's best for you? 

 

Mike Baker, Global Shares head of EMEA business development says: “So, SAYE or SIP – or both? Well the decision is of course yours, but when considering which (or both) important things to think about are:

  1. Why are you offering employees an equity incentive plan? As a company, what do you hope to get out of it? Is it because other companies offer this, or is it because you genuinely want employees to be shareholders in the company they work for?
  2. Budget – what realistically can you spend on this? Not just initial spend, but year on year for say 10 years. The answer to this of course will be heavily influenced by the first point above.
  3. What is the employee demographic of the company? If it is one that is financially aware and that understands the risks associated with markets, they may be more inclined to participate in a SIP.

He adds: "If the appetite leans toward risk aversion, but you want to allow employees to share in any future company success, then perhaps SAYE is the answer.”

If you want to learn more about SAYEs, SIPs or Employee Ownership, why not arrange a call with us? Global Shares provides a complete equity plan management solution that includes share plan administration software, financial brokerage, integrated financial reporting tools, and expert support solutions.  

REQUEST A DEMO

 

 

 

Please Note: This publication contains general information only and Global Shares is not, through this article, issuing any advice, be it legal, financial, tax related, business related, professional or other. The Global Shares Academy is not a substitute for professional advice and should not be used as such. Global Shares does not assume any liability for reliance on the information provided herein.


academy-sidebar

Academy

Academy
 
 
Line
Client Stories
News
Line

 

Tags

 

image 4-1

Never miss a post

Sign up now to receive our Academy posts directly to your inbox.

Sign up now