Save As You Earn (Sharesave) schemes

Q: How does this work for an employee?

Illustration only. Shares are worth £2.25 at the valuation date and the company sets the exercise price at £1.80, the full 20% discount. An employee saves £200 a month on a three year contract and the rules exclude any bonus, so total savings are £7,200 and the option is over 4,000 shares. At maturity the shares are worth £3.00. The employee exercises, paying £7,200 for shares worth £12,000. The £4,800 difference is free of Income Tax and National Insurance. If the employee moves the shares into an ISA within 90 days, later sales are free of Capital Gains Tax. If they sell outside an ISA for £12,000, the gain is £4,800, before the annual exempt amount. If instead the shares are worth £1.50 at maturity, the employee leaves the option unexercised and takes back the £7,200. That last point is the reason Sharesave is popular: the employee's savings are not at risk from a falling share price.

Save As You Earn, often called Sharesave, is an all employee option scheme under Schedule 3 ITEPA 2003. The employee saves a fixed monthly amount, up to £500 a month in total, under a certified savings contract for three or five years and is granted an option to buy shares at a price fixed at the start, which can be up to 20% below market value. If the option is exercised with the savings at maturity there is no Income Tax or National Insurance on the gain, the savings bonus and interest are tax free, and Capital Gains Tax applies only when the shares are sold outside an ISA or pension.

Tax investigation insurance from £108.75 a year (£9.06 a month).Pays up to £100,000 of your accountant's fees if HMRC opens an enquiry. No excess. Buy online in a few minutes.

See my price in 2 questions How the cover works Accountant? Offer cover to your clients or call 01795 841 310

How does a Sharesave scheme work?

Two things run side by side. The company grants an option over its shares, and the employee enters into a savings contract with a savings body under the HMRC certified SAYE prospectus. The number of shares under option is set so that the total exercise price equals what the savings contract will repay. The scheme rules must state at grant whether that repayment figure includes any bonus.

The exercise price cannot be more than 20% below the market value of the shares at the valuation date. If an option is granted at a bigger discount by mistake, HMRC treats it as outside the scheme, and it carries no tax advantage at all. For unlisted companies, the market value is agreed by writing to the HMRC Shares and Assets Valuation team with a proposed value and three years of accounts.

The scheme must be open to all employees and full time directors whose earnings are taxable as general earnings, subject to a qualifying period of service of no more than five years, and options must be offered on similar terms. If applications exceed the shares available, the rules can scale them down in set steps, such as treating five year applications as three year ones. The company registers the scheme and files an end of year ERS return by 6 July each year.

How does the savings contract work?

The employee makes 36 monthly contributions for a three year contract or 60 for a five year contract. Under the current prospectus each contribution must be between £5 and £500 in whole pounds, and the statutory maximum of £500 a month applies across all the employee’s SAYE contracts together. A scheme may set its own lower maximum, and any scheme minimum cannot be more than £10.

At the end of the contract the employee may receive a bonus, expressed as a number of monthly contributions. Bonus and early leaver interest rates follow an automatic mechanism linked to Bank of England Bank Rate, published by HMRC, and a new mechanism took effect on 18 August 2023. Rates were held at 0% from 30 June 2022 while the mechanism was reviewed, so the bonus can be modest or nil. Bonuses and interest are not taxable (section 702 ITTOIA 2005).

An employee can delay up to 12 monthly payments without the contract ending, though each delay pushes back the maturity date and the exercise window. Stopping for good means the contributions are repaid, with interest only if repayment is after the first anniversary, and the scheme rules can provide that the option then lapses. Paragraph 21 of the prospectus bars transferring the contract or its benefits to anyone else, including through a loan arrangement.

Worried about an HMRC check? Tax investigation insurance pays your accountant’s fees if HMRC opens an enquiry or compliance check. Solar Protect cover pays up to £100,000 with no excess. It never pays tax, interest or penalties.

From £108.75 a year (£9.06 a month) for individuals, £117.57 for sole traders and £207.50 for companies and partnerships, including IPT and the £20 admin fee.

See my price in 2 questions or call 01795 841 310.

★★★★★ Rated 4.9 out of 5 on Trustpilot from over 160 reviews

When can the option be exercised?

Normally only in the six months after the bonus date, using the savings repaid. The main exceptions are:

Good leavers. If employment ends through injury, disability, redundancy, retirement, a TUPE transfer or a change of control of the employing company, the option must be exercisable within six months of leaving, and there is no Income Tax however long the option was held.
Death. Personal representatives get 12 months from death, or 12 months from the bonus date if death happens in the six months after it.
Other leavers. Leaving within three years of grant for any other reason usually means the option lapses. After three years, the rules must say either that it lapses or that it can be exercised within six months.
Company events. Takeovers, reconstructions and voluntary winding up can allow early exercise if the rules provide for it.

What is the Income Tax and National Insurance position?

No Income Tax arises on grant. On exercise under the scheme rules there is no charge under section 476 ITEPA 2003 on the difference between the price paid and the value of the shares. The exception is an exercise within three years of grant because of a takeover, reconstruction, voluntary winding up or transfer of the employing company or business out of the group, where the event is not a cash takeover within section 519(3A) to (3J). In that case the gain is taxed as for an unapproved option, with PAYE and National Insurance if the shares are readily convertible assets.

How is the sale of the shares taxed?

For shares acquired by a tax relieved exercise, the Capital Gains Tax base cost is simply what was paid: the exercise price plus anything paid for the option (paragraph 10(4) of Schedule 7D TCGA 1992). The discount and the growth up to exercise therefore fall into the capital gain on sale, at the normal Capital Gains Tax rates after the annual exempt amount.

There is no Capital Gains Tax if the shares are transferred into an ISA within 90 days of leaving the scheme, or into a pension directly from the scheme when it ends. A pension transfer can also be made up to 90 days later, but growth in the meantime may then be taxable.

How does this work for an employee?

Illustration only. Shares are worth £2.25 at the valuation date and the company sets the exercise price at £1.80, the full 20% discount. An employee saves £200 a month on a three year contract and the rules exclude any bonus, so total savings are £7,200 and the option is over 4,000 shares.

At maturity the shares are worth £3.00. The employee exercises, paying £7,200 for shares worth £12,000. The £4,800 difference is free of Income Tax and National Insurance.
If the employee moves the shares into an ISA within 90 days, later sales are free of Capital Gains Tax. If they sell outside an ISA for £12,000, the gain is £4,800, before the annual exempt amount.
If instead the shares are worth £1.50 at maturity, the employee leaves the option unexercised and takes back the £7,200.

That last point is the reason Sharesave is popular: the employee’s savings are not at risk from a falling share price.

What mistakes come up most often?

Letting the six month exercise window after the bonus date pass, after which the option cannot be exercised.
Exceeding the £500 monthly limit when several contracts run at once.
Granting at more than a 20% discount, which removes the scheme treatment from those options.
Assuming an early exercise on a takeover is always tax free: within three years of grant it is not, unless it is a qualifying cash takeover.
Missing the 90 day ISA window and then paying Capital Gains Tax on a later sale.
Forgetting the ERS return, which is due even when no options were granted or exercised.

Sharesave sits alongside the Share Incentive Plan as the two all employee schemes. Discretionary schemes such as the Company Share Option Plan work differently, and the employment related securities overview explains the wider rules.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.