How to save with your employer

12 May 2015

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.

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 & 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

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.

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