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Bonus rates fall again for employee share schemes

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The Treasury has announced another reduction in the bonus rates for the Save As You Earn (SAYE) sharesave scheme.

The scheme was set up to encourage more employees to own shares in their companies. Employers pay a proportion of an employee’s monthly earnings into a bank or building society for a period of 3, 5 or 7 years.

At the end of the period, the employee can take their savings and a tax-free bonus or they can use the cash to buy shares in their employers’ company, usually at a discount of 20 per cent below the share price as it stood at the start of the period.

The Treasury said that the latest move was intended to keep the rates in line with other interest rates.

The last time the rates were changed was on 27 December 2008, with the latest adjustments having come into effect on 17 February 2009.

For three-year contracts, the new bonus rate is 0.6 times instead of 1.5 times the value of an employee’s monthly payments. This represents a cut in the interest from 2.67 per cent to 1.08 per cent.

For five-year contracts, the new bonus rate is 2.6 times instead of 4.8 times the value of an employee’s monthly payments, reducing the interest from 3.04 per cent to 1.67 per cent.

In the case of seven-year contracts, the new bonus rate is 5.6 times rather than 9.3 times the value of an employee’s monthly payments, with the rate of interest coming down from 3.20 per cent to 1.98 per cent.

The Early Leavers’ Rate, which applies to people who take their money out of the scheme before it matures, falls from 2 per cent to 0.5 per cent.

The new bonus rates only cover those employees who joined the scheme after 17 February. Employees who sign up to SAYE will receive the bonus rate for the relevant contract that was in force at the time they joined the scheme and will not be affected by future bonus rate changes.

SAYE is a savings vehicle for employees of companies that operate savings related share option schemes approved by HM Revenue and Customs.

The company offers its employees the option to buy shares in the company at a future date. The option may be granted at a discount of up to 20 per cent of the current share price.

The employee then saves between £5 and £250 per month out of taxed pay on a 3 or 5 years saving contract. The 7-year contract is actually a 5-year contract where the employee leaves the contributions in for a further 2 years.

When the contract matures, a tax-free bonus is received. The employee can then choose either to exercise the option to buy the shares with the proceeds from the savings contract (there is no obligation to purchase), or just to take the proceeds and the bonus.

The bonuses are equivalent to fixed rate interest and are set by the Treasury. In normal circumstances, no income tax or National Insurance Contributions are incurred on the granting or exercising of options.