Save-As-You-Earn

Published: 24 Oct 2015

 

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Tax concessions are made to directors and employees purchasing share options in their employer company, under a Save-As-You-Earn scheme.

 

The participant pays in a fixed, regular amount, and these payments are used to purchase share options at the end of the contract period.  The contribution cannot exceed £500 per month, and contract periods are either 3 or 5 years in length.

 

Tax implications

 

There is no income tax or national insurance on any profit where the strike price is higher than market value on exercise.  The cost of the shares for capital gains tax purposes is the same as the amount paid for them.  There is no capital gains tax if the shares are transferred to an ISA within 90 days of the date they were taken out of the plan.  This is subject to the ISA investment limit.

 

When the contract ends, the participant is paid a tax-free bonus.  Bonus figures depend on contract length and the amount invested.

 

Conditions

 

If a person ceases to be eligible within three years the option cannot be exercised.  This is unless the employee or director has ceased employment due to injury, redundancy or reaching retirement age.  Strike prices cannot be less than 80% of the market value when the options are granted.

 

All participants must be offered shares on similar terms and individuals with an interest of more than 25% on the company would not be eligible.

 

Schedule 3 of the Income Tax (Earnings and Pensions) Act 2003 explains the taxation of Save-As-You-Earn in full.

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