The benefits of investing in your employer

The opportunity to invest in your employer's shares tax-efficiently and at a discount makes Save As You Earn (SAYE) schemes particularly compelling.

But, while there are plenty of tales of employees netting life-changing amounts, they're not a guaranteed money-spinner. The schemes, which are government-backed, allow you to save anything from £5 to £500 a month across one or more schemes.

At the end of the three- or five-year term, you can use your savings plus, in most cases, any bonus they may have accrued to buy shares in your company at a price stipulated at the outset.

As this option price can be as much as 20% lower than the share price when the scheme started, the potential for upside can be significant. Phil Hall, special adviser to the employee share-ownership organisation ProShare, says that around 80% of employers with SAYE schemes offer the full 20% discount.

"It provides a decent amount of cushioning if the share price doesn't perform well over the term of the scheme, but also boosts returns if it does," he explains.

Ups and downs

An an example of the potential return, last August nearly 23,000 BT employees were able to to buy shares valued at around 388.5p for just 61p each when their five-year SAYE scheme matured. For the 7,000 employees who made the maximum monthly contribution – set at £225 by BT – this represented a tasty profit of more than £70,000 each.

But although there are winners, dreams of exotic holidays and your mortgage-free life can be dashed if your company's share price falls below the SAYE scheme's option price.

Although this can seem unlikely given the share price discount offered, this is exactly what happened to employees at supermarket giant Tesco.

According to figures from law firm Pinsent Mason, the Tesco share price was 405.33p in October 2011 - but fast-forward three years and it had plummeted by 55% to 182.60p, leaving employees in maturing three-year schemes with an option to buy shares at a price higher than their market value.


Safety nets

While it's unfortunate if you find yourself in this position, all is not lost.

Matthew Findley, a partner at Pinsent Mason, explains: "There's no real risk to the employee. There's no compulsion to buy shares, so if the share price falls below the option price, you can simply take your savings back with any bonus that may have accrued."

Admittedly, bonus rates are nothing to get excited about. Set by the Treasury, these are linked to three- and five-year swap rates and currently stand at a disappointing 0%.

However, Inez Anderson, partner at financial advisory firm Smith and Williamson, says the ability to walk away with the cash provides reassurance to many in SAYE schemes. "There isn't really anything to lose, other than the cash flow and the potential growth
if you'd put the money in a savings account or investment," she explains.

"There's the potential of a windfall if the shares are worth more than the option price, and even if they do decide to take the cash, many people end up with a lump sum they might not have had otherwise."

There's also protection in the event of your company going bust. As your savings are held by a financial institution such as a bank or building society, although your options will disappear with your employer, your savings won't be used to pay creditors.

In addition, if the savings institution gets into trouble, you're protected through the Financial Services Compensation Scheme (FSCS). "The FSCS provides compensation of up to £85,000 per person per bank or building society," explains Hall.

"You need to check whether you had other savings with the company holding your SAYE scheme but, that aside, even if you saved the maximum £500 per month over five years, you'd be well below the limit for compensation."



Tax trips

Although there's plenty of protection in place to shield SAYE investors, the taxman also needs to be given careful attention.

There's no income tax or national insurance to pay on the difference in value between what you saved and the value of the shares you buy, but any profits could trigger a capital gains tax (CGT) liability when you sell the shares.

An annual CGT allowance (£11,000 in 2014/15) gives you some room for manoeuvre according to Martin Benson, a partner at chartered accountants Baker Tilly.

"If you've made a gain that exceeds the annual allowance, or you've disposed of other assets that also made gains, you could sell shares over several years to take advantage of more than one year's allowance," he suggests. "If you're married or in a civil partnership you could also transfer some shares to your partner to use their allowance. There are ways to engineer it so you don't have to pay CGT."

Another option is to transfer the shares into an Isa or a pension. This instantly wipes out any CGT liability, but it must be done within 90 days of exercising the option and acquiring the shares.



Look before you leap

With many advantages and safeguards in place, Malcolm Hurlston, chairman of the Employee Share Ownership Centre, says SAYE schemes represent a good opportunity for many employees. "Where a share performs well, you can find yourself with a substantial capitalsum."

But while he believes the schemes are pretty much disaster-free, he advises employees to look beyond the potential of a stockmarket windfall. "Think about how much you can afford to commit and whether you should prioritise clearing any debt," he says. "You can also end up with a high concentration in one company's shares."

This feature was written for our sister publication Money Observer



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