SAYE (Sharesave) Bonus Rates Reintroduced

The mechanism previously used to calculate SAYE bonus and interest rates was complex, and HMRC has worked with stakeholders to develop a new, simpler method. Information about the new mechanism, the basis by which the rates will be set in the future, is covered in ERS Bulletin 51.

Linking bonus rates to Bank Rates simplifies the process in several ways:

• SAYE bonus rates have already been calculated for the different levels of Bank Rates and published in a Bonus Rate table.
• Regarding timing, the Bank of England Monetary Policy Committee set the Bank Rate. These meetings typically take place eight times a year and dates are published in advance. If the Bank Rate changes, new bonus rates will apply 15 days later. HMRC will publish guidance, keeping a record of Bank Rates, bonus rates and the effective date for any change.
• A new savings prospectus will not be needed if there is a bonus rate change. Instead, updated wording in the prospectus will reference the bonus rate mechanism document which contains the Bonus Rate table.

Having advance notice that the new prospectus will apply from 18 August 2023 is helpful, providing clarity around timeframes and launch documentation, especially welcome as we approach the busiest period of the year for SAYE invitations.

THE DETAIL

Background

One of the requirements of a tax advantaged SAYE plan is a link to an approved savings arrangement. The savings terms and bonus and interest rates to be paid by the savings carrier (the bank or building society) to participants, are set out in the savings prospectus issued by HMRC. All approved savings carriers must use the prescribed prospectus, meaning all participants receive the same savings terms. Bonus and interest rates, along with the prospectus, change from time to time. The rates and prospectus effective on the date of an SAYE invitation apply to all contracts entered into for that launch.

Bonus and interest

• Participants who join SAYE agree to save a certain amount per month over a three- or five-year period, e.g. £100 per month for three years.
• Interest paid on these savings is known as the bonus and is shown as a multiplier of the monthly savings amount, e.g. a multiplier of 1.1 would mean someone saving £100 per month would receive a bonus payment of £110. The bonus rate has been set at zero for many years.
• The level of bonus to be paid to participants is fixed at the start of the savings contract and is paid to participants by the savings carrier at the end of the savings period, e.g. £110 paid after three years of saving.
• The total value of a participant’s savings and bonus can be used to calculate the number of shares granted under the SAYE option, e.g. (£100 x 36 months) + £110 = £3,710, dividing £3,710 by the option price = shares under option.
• It’s usual for the bonus payment to be used within the grant calculation enabling participants to receive the maximum benefit. However, the rules will give a company a choice, so the decision regarding the inclusion of the bonus must be included within the invitation document.
• If an invitation is oversubscribed, one method of scaling is to exclude the bonus from the option calculation.
• Where the bonus payment is not used to exercise an option, the participant will receive a cash payment from the savings carrier.
• Participants withdrawing their savings before the savings maturity date do not receive the bonus. However, they may receive some interest on their savings if repayment is made on or after the first anniversary of the savings contract start date and at least 12 monthly contributions have been paid. The level of interest to be paid on early withdrawals (the early leaver rate) is fixed at the start of the savings contract and has also been set at zero for many years.
• Early withdrawal interest and bonus payments are tax-free.
• International SAYE schemes are unlikely to have fixed bonuses. However, companies should check their scheme rules and consider whether or not a ‘notional’ bonus can be applied when calculating shares under option to be consistent with the bonus rates under UK SAYE plans.

The new mechanism

Details of how rates are calculated are set out in the bonus rates automatic mechanism with bonus rates linked to Bank of England Bank Rates. The document includes a table showing the bonus and early leaver interest rates to be applied for each applicable Bank Rate. An extract from the table follows.

The Bank of England Monetary Policy Committee (MPC) set the Bank of England Bank Rate. Any new Bank Rate usually applies from the day following the MPC meeting with meetings typically taking place eight times a year. Dates are published on the Bank of England's website in advance. If there is a Bank Rate change, new bonus rates will apply to SAYE agreements made under invitations which are sent on or after the fifteenth day following the date the new Bank Rate applies.

As an example:

• 3 August 2023, MPC announcement on Bank Rate.
• 18 August 2023, new bonus and early leaver interest rates apply to SAYE invitations made on or after this date.

To support the new mechanism, HMRC will record bonus rates, early leaver rates and the effective date of any change online at Change in bonus rates for Save As You Earn (SAYE) Share Option Schemes. For now, the current rates have been provided, but HMRC are expecting to add the rate which will apply from 18 August 2023 following the confirmation of the Bank Rate in early August 2023.

SAYE prospectus changes

Changes taking place on the 18 August 2023:

• The SAYE prospectus dated 30 June 2022 is withdrawn
• The SAYE prospectus dated 18 August 2023 takes effect.

Changes applied to the new prospectus dated 18 August 2023

HMRC have issued a new Specimen Save As You Earn (SAYE) prospectus to give effect to the mechanism. Changes include:

• A new definition for ‘bonus rate mechanism document.’
• Additional wording to section 7 to include that the contract shall terminate unless the savings contract start date is within three months of the date of a new bonus rate applying.
• Instead of including bonus and interest rates, the wording has changed to state that the rates are calculated in accordance with the bonus rate mechanism document.

This means the prospectus will not require replacement to update the bonus and interest rates in future.

Scheme rules may allow invitations to be made in the 42 days following a new savings prospectus being announced or taking effect. The wording may need to be extended to include ‘or a new bonus rate being announced or taking effect.’ Alternatively, the rules may allow invitations in the 42 days following any day on which the Directors resolve that exceptional circumstances exist which justify the making of invitations. Where this is already in scheme rules, it would be useful to check with advisers whether a new bonus rate being announced or taking effect could be treated as an exceptional circumstance.

Key take-aways

• The new prospectus and bonus rates take effect from 18 August 2023 and will apply to invitations made on/after that date.
• Bonus rates will be linked to Bank of England Bank Rates. If the Bank Rate changes, the new bonus rates will apply 15 days later.
• Dates for the Bank of England Monetary Policy Committee meetings are published in advance and, therefore, can be included in invitation launch timetables.
• SAYE bonus rates for different levels of Bank Rates have been published in a Bonus Rate table. This also includes the early leaver interest rate (paid from the first anniversary of the savings contract start date if at least 12 monthly contributions have been paid).
• In advance of the company’s next SAYE invitation, agree whether the bonus should be used when calculating shares under option.
• Although international SAYE schemes are unlikely to have fixed bonuses, companies should check their scheme rules and consider whether or not a ‘notional’ bonus should also be applied when calculating shares under option.
• The savings prospectus will not change each time there is a bonus rate change. Companies should check scheme rules and speak to advisers to understand if the company has flexibility to issue invitations within 42 days following a bonus rate change.