Income Tax (Trading and Other Income) Act 2005 Explanatory Notes

Chapter 4: SAYE interest

2683.This Chapter rewrites the exemption for interest arising under certain contractual savings schemes, commonly known as SAYE schemes. The sections are based on section 326 of and Schedule 15A to ICTA and on Schedule 12 to FA 1995.

2684.An eligible employee who is granted options under a SAYE option scheme must agree to enter into a linked savings arrangement operated either by the National Savings Bank or by an authorised financial institution. Where the Treasury are satisfied that the arrangement is a linked savings arrangement, and meets any appropriate conditions, they certify it. Such an arrangement is called a “certified SAYE savings arrangement”.

2685.For the meaning of “SAYE option scheme”, see section 516 of and Schedule 3 to ITEPA.

2686.Under a linked savings arrangement, the employee agrees to save a specific amount each month, which may be between £5 and £250. At the end of the contract period (three, five or seven years) the contributions made will be repaid to the employee together with a bonus (based on the length of the contract and the level of contributions made). The employee may then use the money to exercise his or her share options under the SAYE option scheme. If the employee does not complete the contract, the contributions made are repaid together with interest (where this is due). In both cases, providing the institution operating the linked savings arrangement is authorised (where necessary), and the scheme complies with any Treasury requirements regarding certification, the bonus and interest payments are exempt from income tax.

2687.Exemption was also available for interest and bonuses paid under “ordinary” SAYE schemes, which are not share option linked, where the contract was entered into before 1 December 1994. But any contract entered into before that date will have run its course before 2005-06. The transitional provisions in paragraph 7(1) of Schedule 12 to FA 1995 have therefore not been rewritten in this Chapter.

2688.The exemption from tax is set out in section 702. The remainder of the Chapter defines terms and sets out the administrative requirements for linked savings arrangements and for providers of arrangements.

Section 702: Interest under certified SAYE savings arrangements

2689.This section is based on section 326 of ICTA. It introduces the key term “certified SAYE savings arrangement”. The definition of that term in section 703 introduces both the various conditions to be met by the savings schemes (and the financial institutions who provide them) and the certification machinery.

2690.Subsection (3) qualifies the exemption by reference to:

  • the rules in section 707 for authorisation of institutions providing arrangements; and

  • a provision in FA 1988 in respect of building societies.

2691.Schedule 12 to FA 1988 contains provisions which apply when the business of a building society is transferred to a company in accordance with the Building Societies Act 1986 (that is, when a building society turns itself into a bank). Paragraph 7 of Schedule 12 to FA 1988 ensures that any interest payable after the transfer continues to be eligible for exemption, notwithstanding the fact that the transfer means the savings arrangement ceases to be a certified SAYE savings arrangement.

2692.Subsection (4) defines “interest” for the purposes of the Chapter. Although section 326(1) of ICTA refers to “any terminal bonus, or interest or other sum”, in practice only bonuses and interest are payable under SAYE schemes.

2693.It is not clear why the source legislation refers to “other sum”. The only other sums involved are contributions returned to the employee. But these are deposits - capital - being returned to an investor and are not themselves taxable. The words “other sum” add nothing to the provision (indeed, they might cause confusion) and are not rewritten.

2694.All bonuses are computed by reference to the level of contribution made by the employee and to the length of the savings contract. Despite the expression “terminal bonuses”, a bonus is interest for tax purposes. A separate reference to the terminal bonus might put beyond doubt that the bonus is exempt from tax. But such a reference might also cast doubt on whether the bonus is in fact interest. That would in turn create uncertainty as to how the bonus would be taxed if the SAYE scheme should lose the status necessary for the income from it to qualify for the exemption in section 326 of ICTA. The section therefore simply uses “interest” throughout as including “bonus”.

2695.Paragraphs 184(2) and 445(3) of Schedule 1 to this Act follow suit in amending section 477A(4) of ICTA (building societies: regulations for deduction of tax) and section 271(4) of TCGA (other miscellaneous exemptions), both of which refer to the source legislation for these sections.

Section 703: Meaning of “certified SAYE savings arrangement”

2696.This section is based on section 326 of and Schedule 15A to ICTA. It introduces the term “linked savings arrangement”, defined in subsection (2). The source legislation refers to “contractual savings schemes” but this is only one of a number of names by which these arrangements are known. As any arrangement entered into since 1994 must be linked to a SAYE option scheme, “linked savings arrangement” reflects the present position.

2697.Subsection (2) introduces the various types of arrangement (set out in section 704) and the required link between the savings arrangement and the SAYE option scheme. Paragraphs 139 to 141 of Schedule 2 to this Act preserve the commencement rules for the amendments to this relief introduced by Schedule 12 to FA 1995. Those paragraphs affect what is or is not a certified SAYE savings arrangement.

2698.The definitions in subsection (3) are based on terms used and definitions provided by Schedule 15A to ICTA.

Section 704: Types of arrangements and providers

2699.This section sets out what types of arrangement may be linked savings arrangements. It provides definitions of each type of arrangement. These definitions are based on section 326 of and Schedule 15A to ICTA.

2700.Subsection (1) indicates that linked saving arrangements are either a “national savings arrangement” (defined insubsection (2)), or an “institutional arrangement”, that is, one provided by a financial institution (defined insubsections (3) to (6)). The main distinction between a national savings arrangement and an institutional arrangement is that the provider of an institutional arrangement must be authorised (see section 707). The Treasury may also impose requirements on an institutional arrangement before they certify it under section 705.

Section 705: Certification of arrangements

2701.This section sets out the administrative provisions for the certification by the Treasury of linked savings arrangements. It also provides the powers for the Treasury to impose further requirements on an institutional arrangement. In practice, this means that arrangements must correspond to the Treasury model scheme for these arrangements. It is based on section 326 of and Schedule 15A to ICTA.

2702.In the source legislation, the power to impose further requirements is in respect of requirements “for the purposes of” section 326 of ICTA. But Schedule 15A to ICTA has “effect for the purposes of section 326” (paragraph 1 of that Schedule), so that the section must be read with the Schedule. This Chapter incorporates both the section and the Schedule, so this section applies the power in respect of requirements for the purposes of the Chapter.

Section 706: Withdrawal and variation of certifications and connected requirements

2703.This section is based on Schedule 15A to ICTA.

Section 707: Authorisation of providers

2704.This section is based on section 326 of and Schedule 15A to ICTA.

Section 708: Withdrawal and variation of authorisations

2705.This section is based on Schedule 15A to ICTA.

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