HMRC updates SAYE bonus mechanism

HMRC has updated the mechanism for calculating bonus rates for participants in Save As You Earn (SAYE or "Sharesave") schemes, as announced in HMRC Employment Related Securities Bulletin 51.

A new specimen SAYE prospectus and bonus rate mechanism will become effective from 18 August 2023 meaning that any new savings arrangements (or "savings contracts") entered into after that date will have a bonus attached.  Bonus rates will effectively be determined by reference to an interest rate set at 3% below the Bank of England base rate ("Bank Rate") up to a Bank Rate of 5%.  A higher discount to the Bank Rate then applies such that the bonus rate caps out at an effective 3.5% rate should the Bank Rate reach 8% or more.  The minimum bonus rate will be zero.

The long lead-in time to this change taking effect is due to the need for providers and employers to prepare their systems and processes for the new mechanism, and will undoubtably lead to a number of companies having to consider whether to delay their SAYE launches until after the new prospectus takes effect.  Before deciding to delay, those companies will have to consider the future effects of an "off timetable" launch.

For companies that launch their SAYE offer before 18 August, the current SAYE prospectus (nil bonus) will continue to apply provided that the first monthly contribution is made within 30 days of 18 August.  In practice, this means by no later than 15 September given that the last two days of that 30 day period fall at a weekend.  If the start date of the savings arrangements is due to fall later, the SAYE offer would need to be cancelled and relaunched under the new prospectus.

A further change which HMRC has introduced is to remove the need to publish a new SAYE prospectus each time the bonus rate is to change.  Instead, the new specimen SAYE prospectus has been made "evergreen" and companies and their advisers will need to determine the correct bonus rate by applying the rates set out in the Annex to HMRC's "SAYE bonus rates mechanism document". Interest rates which apply to savings repaid to leavers who have contributed at least 12 monthly contributions are also set out in the Annex to the SAYE bonus rates mechanism document and HMRC has committed to maintain a webpage detailing bonus rates, early leaver rates and the effective date of any changes.

Bonus rates will, in future, change on the 15^th day following a new Bank Rate taking effect (which will generally be the day following the meeting of the Bank of England Monetary Policy Committee at which the Bank Rate is changed).

If the Bank Rate remains at the current 4.5%, this means that a bonus equal to 0.8 monthly contributions will be added to a three-year savings arrangement and a bonus equal to 2.3 monthly contributions will be added to a five-year savings arrangement (in each case equivalent to a 1.5% per annum interest rate). HMRC has stated that it will confirm the rate to apply from 18 August 2023 shortly after the August 2023 Bank Rate is announced.

Bonuses are added to participants' savings once the SAYE options have matured (participants having made the requisite 36 or 60 monthly contributions). Depending on how the SAYE option has been structured, the participant may use that bonus to acquire additional shares or take the bonus as a tax-free sum.  Once the savings arrangement has been entered into, the bonus rate is fixed for the duration of those arrangements, and so employees who are already saving under existing SAYE savings arrangements are not affected by the rate changes.

As there has been no bonus on a three year savings arrangement since 2011 many employees (and indeed their employers) will have little experience of SAYE schemes operating with bonus or interest.  It is therefore recommended that employee communications, and grant documentation, for new SAYE launches are reviewed and updated to ensure that these deal with the treatment of bonuses.  Companies operating international SAYE will also need to consider whether to introduce interest bearing savings arrangements for their participants.