Detailed Definition
A ShareSave scheme, also known as a Savings Related Share Option Scheme (SRSOS), is an employer-backed share option plan that allows eligible employees to save monthly over a period, leading to the option to buy company shares at a discounted price. HM Revenue & Customs (HMRC) approves these schemes, which therefore provide favorable tax treatments under specific conditions.
How It Works
- Participation: Employees opt to join and agree to save a fixed monthly amount between £5 and £500.
- Savings Period: Typically, employees save consistently for 3 or 5 years.
- Option Price: At the outset, an option to buy company shares at a discounted price (typically up to 20% off market value) is granted.
- Maturity: At the end of the savings period, employees can either buy shares with the saved amount plus interest/bonus or take the savings in cash.
Tax Benefits
- Income Tax: There is no income tax charge when the options are granted or exercised, provided specific conditions are met.
- Capital Gains Tax (CGT): Gains from selling the shares could be subject to CGT, depending on the overall personal tax situation.
Examples
Example 1: Employee Purchase
An employee agrees to save £100 per month for 3 years in a ShareSave scheme. After 3 years, they have £3,600 saved. The share option price was set at £8 when the current market price is £10, so the employee can buy 450 shares (£3,600 / £8 per share) instead of 360 shares at the market price, benefitting from the lower locked-in price.
Example 2: Using the Cash
Instead of purchasing shares with the savings amount, the employee may decide to take the £3,600 plus any interest or bonus on savings in cash.
Frequently Asked Questions
Q1: What happens if I leave the company before the savings period ends?
A1: Generally, if you leave the company before the scheme matures, unless under special circumstances such as retirement or redundancy, you may lose the right to exercise the options but will usually get your savings back.
Q2: Can I stop my contributions if I can’t afford them anymore?
A2: Yes, you can cease contributions, but this may affect your ability to purchase shares at the set discounted price.
Q3: How does the discount work?
A3: The discount, usually up to 20%, is set when the option is granted. This allows employees to purchase shares at a reduced price compared to the market price at the end of the savings period.
Q4: Are there any associated risks?
A4: Yes, the main risk is that the share price may fall below the option price, in which case it might not be beneficial to purchase the shares.
Q5: Is interest paid on the savings?
A5: Usually, the savings accounts in a ShareSave scheme accumulate interest or a tax-free bonus, depending on the details of the scheme.
Related Terms with Definitions
- Employee Share Ownership Plan (ESOP): A program that provides a company’s workforce with an ownership interest in the company.
- Employee Share Ownership Trust (ESOT): A trust established to encourage employee share ownership.
- Save-As-You-Earn (SAYE): A similar scheme where employees save monthly to fund the potential purchase of shares at a discounted price.
- Share Incentive Plan (SIP): HMRC approved plans where employees can get free shares or buy shares, often funded by salary sacrifice.
Online References
Suggested Books for Further Studies
- Equity Compensation for a Multinational Workforce by CCH Tax Law Editors
- Employee Stock Options by S.P. Kothari
- Understanding Equity Management by Thomas Vossen
Accounting Basics: “ShareSave (Savings Related Share Option Scheme)” Fundamentals Quiz
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