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Monday, 15th April 2024
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A complete guide to Save As You Earn share option schemes Back  
Jim Ryan details the legislative provisions necessary to establish a Revenue approved savings related share option schemes (SAYE schemes).
An SAYE scheme must be made available to all employees and full-time directors with a minimum period of employment determined by the employer, but not exceeding three years.

Basic principles

There are four principles features to a SAYE scheme. Firstly, an employee enters into a saving agreement whereby a fixed amount of after tax salary is saved on a monthly basis. Secondly the savings are invested in a Contractual Certified Savings Scheme. Thirdly the employer grants the employee an option to acquire shares with their savings at a future date at a discount of up to 25 per cent of their market value at the commencement of the savings period. Finally the employee exercises the right to acquire shares.

There is no compulsion on an employee to purchase shares at the end of the savings period with their savings. Therefore an employee who enters into a savings scheme is keeping their options open, that is if the share price drops they can take a refund of their savings plus tax free interest.
The SAYE legislation enables an employee to acquire shares under a share option agreement with their accumulated savings, at a discount, at a future date in their employer company, or parent company if publicly quoted on a recognised stock exchange. The 1999 legislation exempts the employee from any tax charge on the receipt of this option right, if it is granted under an approved SAYE scheme. In addition employees are exempts from any tax charge on an "income gain" realised on the exercise of the right. The "income gain" is the difference between the purchase price (option exercise price) and the market value of the shares at the date of purchase/ exercise. Any income gain realised by the exercise of a share option which is not granted under a SAYE scheme will continue to be liable to income tax.

To qualify for an exemption from income tax numerous conditions must be satisfied and these will be discussed later in this article. It is important to note that although an exemption from income tax arises at the date of purchase/ exercise, a capital gains tax liability may arise when the shares are ultimately disposed of.

An employer is entitled to a deduction for the cost of establishing a SAYE scheme. This expense can be claimed in the accounts for the period in which the expense is incurred. However, if the SAYE scheme is approved by the Revenue in a period exceeding nine months from the end of the accounting period in which the expense is incurred a deduction will be available in the accounting period in which approval is obtained.

Savings agreements

The purchase of the shares must be financed by savings out of after tax salary. The savings must be deducted from the employees pay each month and paid into a Certified Contractual Savings Scheme (CCSS) by the employer. The legislation does not permit weekly or bi-weekly deductions to be paid into a CCSS. Therefore, where employees are paid on a weekly or bi-weekly basis the employer must deduct the required savings and deposit them in a holding account until the end of the month when they can then be transferred into a CCSS.

Employees must elect to save a fixed amount for a period of three or five years. Where an employee decides to save for a five year period they can elect to leave their savings in the CCSS for an additional two years and receive tax free interest. The length of the savings period and the decision as to whether the employee wishes to leave their savings invested for an additional period of two years under the five year savings scheme must be taken on day one.

The level of savings cannot be increased or reduced. However, there is nothing to stop an employee from participating in more than one SAYE scheme operated by their employer on the condition that the aggregate of their monthly savings does not exceed IrĀ£250. An employer can introduce a SAYE scheme on an annual basis subject to an employee not exceeding an aggregate monthly savings threshold of IrĀ£250. Therefore the maximum that any one employee can save is IrĀ£3000 per annum. The employer can impose a lower maximum savings level at their own discretion.

As well as imposing a maximum level of savings the legislation also permits the employer to impose a minimum level of monthly saving. The minimum level cannot be greater than IrĀ£10 per month, but may be less.

Despite the absence of a reference to a savings holiday in the legislation the Revenue Commissioners have indicated that they are prepared to approve a SAYE scheme which permits participating employees take a contribution holiday of up to six months. This is particularly helpful in the case of maternity leave or alternatively where employees find themselves in position of unforeseen financial hardship. Alternatively an employee can elect to cease making saving contribution into the CCSS, but if they cease they cannot exercise their option to purchase.

Savings institutions

The financial institution operating the CCSS must have approval from the Revenue Commissioners. They must fix an interest rate at the commencement of the savings period so that the value of the accumulated savings plus interest can be determined at the outset. Any interest earned within a CCSS is tax free and not subject to DIRT. This exemption is available even in circumstances where the employee decides not to purchase shares at the end of the savings period but withdraws their savings plus interest. At the end of a completed saving period where an employee chooses to purchase shares their interest is converted into a bonus. The accumulated value of the savings plus bonus will determine the quantity of shares that can be purchased at the end of the chosen savings period. I shall discuss this in more detail when looking at the issues associated with the granting of options.

Section 519C TCA 1997 permits, subject to the approval of the Revenue Commissioners the following financial institutions to operate CCSSs:

ā€¢ Holders of a licence under section 9 of the Central Bank Act, 1971,
ā€¢ A building society within the meaning of section 256 TCA 1997,
ā€¢ ACC, ICC, An Post,
ā€¢ Certain credit unions and trustee savings banks, and
ā€¢ Other persons authorised by the Minister for Finance

Interest and bonus on savings

The rate of interest and bonus payable by the CCSSs has been capped by the department of Finance. The maximum interest payable is 2 per cent per annum, however the financial institution can determine its own rate subject to the 2 per cent ceiling.

The rate of bonus payable is also capped. The level of maximum bonus is determined by the length of the savings period. The maximum bonus payable is 2 times the monthly savings for the three year saving scheme and 6 times the monthly savings for the five year saving scheme. In circumstances where an employee chooses to not to purchase shares at the end of the five year scheme they can leave their savings invested for a further two year and in these circumstances the bonus is 12.5 times the monthly savings.

Granting of options

The level of savings and the interest rate guaranteed by the provider of the CCSS will determine the number of shares that an employee can purchase at the end of the chosen savings period. As mentioned above an employer can grant an option to purchase shares at a discount of up to 25 per cent of the shares market value at the commencement of the savings period. There is no requirement for an employer to grant an option at a discount of 25 per cent and the employer may grant an option at a nil discount or anywhere between 0 per cent and 25 per cent. The level of the discount and the aggregate of the monthly savings plus the interest earned will determined the quantity of shares over which an option can be granted.

At the commencement of the savings period the employer must grant an option to the participating employee to acquire a maximum number of shares based on the monthly savings and the interest rate under the CCSS.

Example

Assume the market value of a share at the commencement of the savings period is IrĀ£5 each and the employer permits an employee to purchase shares at a 20% discount, that is at IrĀ£4 each and the employee elects to save IrĀ£200 per month over a three year period - how many shares can be acquired by exercising the option. This cannot be determined until the interest rate guaranteed by the financial institution is determined - lets assume the bonus rate is the maximum of two months savings.

Therefore at the end of the three year savings period the funds available to acquire shares under the SAYE scheme will amount to;

If the share price after three years is IrĀ£10 the employee can acquire IrĀ£19,000 (1,900 @ IrĀ£10) worth of shares for only IrĀ£7,600. In circumstances where the shares are sold at that date the difference of IrĀ£11,400 (IrĀ£19,000 less IrĀ£7,600) will be liable to capital gains tax at 20% rather than income tax at a marginal rate of up to 46%, a net saving of 26%.

Revenue approval process

The Revenue Commissioners have introduced an approval process for both the employer and the provider of the Certified Contractual Savings Schemes (CCSS). All applications for approval have to be directed to the Chief Inspector of Taxes, Employee Share Scheme Section. If the Revenue Commissioners refuse to grant approval to either a SAYE scheme or a CCSS a right of appeal exists.

A company wishing to implement a SAYE scheme must make a formal submission to the Revenue Commissioners accompanied by the following information:

ā€¢ Scheme Rules and Guidelines
ā€¢ Employee Explanatory Booklet
ā€¢ Memorandum and Articles of Association
ā€¢ Copies of Letter of Invitation to Participate, Option Certificate, Notice of Exercise of Option
ā€¢ Copy of CCSS application form
ā€¢ Copy of Board resolution establishing the scheme
ā€¢ Declaration from the company secretary confirming the shares are qualifying shares and that
the scheme is not being put in place for the benefit only of higher paid executives

Before approving a Certified Contractual Savings Scheme the Revenue Commissioners must be satisfied that the scheme is operated by a specified financial institution. In addition the CCSS must provide for periodic payments to be made by participating employees for a specified period stated at the commencement of the savings period and the savings plus interest earned may be used for the purpose of financing the acquisition of shares purchased under a SAYE scheme approved by the Revenue Commissioners.

Taxation treatment

There is no tax saving available on contributions into a CCSS, but any interest earned on the salary deductions invested is tax free even is circumstances where the employee elects to withdraw their funds and not exercise their right to acquire shares.

Although the shares can be purchased at a significant discount there is no income tax charged at the date of purchasing the shares. However, if the employee disposes of the shares at that date or a future date there will be a liability to capital gains tax (CGT) on the profit. The amount liable to capital gains tax is the difference between what the employee pays for the shares and their market value at the date of disposal . Where the shares are retained for a period of at least 12 months the employee will be entitled to index the cost price of their shares in line with the index factor published by the Revenue Commissioners when calculating any liability to CGT. The annual exemption of IRĀ£1,000 may also be claimed as can any losses forward or losses realised in the same tax year when calculating the CGT liability.

Exercise of rights to purchase

Generally, shares can only be acquired by exercising the option within six months from the end of the chosen savings period. However, in certain circumstances the option can be exercised at an earlier date or in the case of death a later date.

If an employee decides to cease saving they cannot exercise their right to acquire shares even with the accumulated savings at that date. However if saving contributions cease due to the death of the employee during the savings period their executors may exercise their right to acquire shares at any date up to 12 months from the date of death. In circumstances where the employee dies within six months after the end of the savings period without exercising the right to purchase shares their executors may acquire the shares at any date up to 12 months from the end of the savings period.

In circumstances where an employee ceases employment before the end of the chosen savings period due to injury, disability, redundancy, retirement on reaching 66 years of age the SAYE scheme must enable such ex-employees exercise their right to acquire shares with their accumulated savings and interest within 6 months of that date to the extent that their are sufficient funds to exercise their right in part. An employee who continues to work after reaching 66 years of age can exercise their right to purchase shares within six months after reaching that age. Additionally, where an employee ceases employment due to a reason other than those specified in this paragraph, but has been saving for a period of at least three years the employer has the discretion to include in the Rules of the scheme the right for that employee to purchase shares under the agreed terms of the option to the extend that their savings can finance a purchase in part.

To date the Revenue Commissioners have approved five SAYE schemes, the first being Norwich Union. In addition they have approved three saving scheme providers, including the State owned ACC Bank. All the schemes approved to date are in public companies, however there are a number of private companies actively considering introducing such schemes.

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