How to save with your employer
Put some of your earnings into the company you work for and you could be quids in, given the generous tax treatment and discounts on offer.
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.
SAYE, which is government-backed, allows 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.
As an example of the potential return, last August nearly 23,000 BT employees were able 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 dreams of exotic holidays and a 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 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.
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 & 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."
SAYE investors also need to give the taxman 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 2015/16) gives you some room for manoeuvre, according to Martin Benson, a partner at chartered accountant 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."
You could transfer the shares into an Isa or pension, which wipes out any CGT liability. 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 capital sum."
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."
SAYE at a glance
- Save from £5 to £500 a month from taxed pay into three- or five-year savings contracts.
- Schemes include an option to buy shares at a price set at outset, which can be up to 20% less than the market price at that time.
- A bonus, which is set by HM Treasury and cannot fall below zero, is added to savings.
- When a scheme matures, employees can use their savings to buy shares at the price set at outset or have their contributions returned.
- Bonus and any gains are exempt from income tax and National Insurance but are subject to capital gains tax.
- Shares can be transferred into an Isa or pension within 90 days of exercising the option.
Save as you earn
A tax-efficient cash saving scheme that lets employees save towards buying shares in the company they work for at a discounted price. At the end of a specified term, participating employees have the option to buy shares in the company or take the savings in cash. The share option works like a warrant, with a special share price set (known as the option price). If the company’s shares have increased in value when the term is finished, employees can buy the shares at the option price. If the shares are worth less than the option price, the employee simply takes the cash.
An unexpected one-off financial gain in cash or shares, generally when mutual building societies convert to stock market-quoted banks. Also windfall tax, a one-off tax imposed by government. The UK government applied such a measure in the Budget of July 1997 on the profits of privatised utilities companies.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
The Financial Services Compensation Scheme is the compensation fund of last resort for customers of authorised financial services firms. If a firm becomes insolvent or ceases trading, the FSCS may be able to pay compensation to its customers. Limits apply to how much compensation the FSCS is able to pay, and those limits vary between different types of financial products. However, to qualify for compensation, the firm you were dealing with must be authorised by the Financial Services Authority (FSA).
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.