The best-known employer share scheme is save as you earn (SAYE). First introduced on 1 July 1981, the scheme can be a no-risk opportunity to benefit from any growth in an employer’s share price.
‘No-risk’ is not strictly true, as when investing via SAYE the employee could be missing out on interest they could be receiving elsewhere.
But this is a minor quibble, as at worst the individual is guaranteed to at least receive their money back, unless they purchase and retain the shares on maturity.
At the start of each plan an option price will be given for which company shares can be purchased at the end of the plan. This price can be at a discount of up to 20 per cent on the market price of the shares at the start of the plan.
The plan will last for either three or five years, and a fixed amount of between £5 and £500 can be saved each month. Multiple SAYE plans can be used provided the total monthly amount does not exceed £500.
It is possible for an employee to stop the plan at any point and receive their money back, but it is not possible to vary the amount once the plan has started. There may also be an option to take a payment holiday and extend the term of the plan.
Options once the term ends
At the end of the term the cash savings can either be returned to the individual, or they can be used to purchase shares at the original option price.
No tax or national insurance is due at this point, even if the option price is significantly below the prevailing share price. If the share price is lower than the option price then the employee can simply receive their savings back. See Box One.
Once the shares have been purchased, they will fluctuate in value and the employee will be entitled to any dividends paid. The risk-free element has now been removed, meaning many will decide to sell their shares.
There are three main ways of doing so. The most straightforward is to simply sell. Any difference between the cost price and the sale price is a capital gain, or loss. Any gain in excess of the exempt amount (£11,700 for 2018-19) is then added to other income.
Any amount which falls below the UK higher-rate threshold is taxed at 10 per cent and any excess at 20 per cent. See Box Two.
In-specie Isa subscription
It is also possible to use a maturing SAYE scheme to make an in-specie Isa subscription within 90 days of the SAYE scheme maturing.
One advantage of doing so is that the shares do not have to be sold. The other is that the Isa subscription is not a disposal and so does not give rise to capital gains tax (CGT). However, it does count towards the Isa allowance (£20,000 in 2018-19).
Even if the intention is to immediately sell the shares, using an Isa can reduce or even eliminate CGT. See Box Three.
Sipp contributions
Another possibility is to use a maturing SAYE plan to make an in-specie pension contribution, typically into a self-invested personal pension (Sipp), again within 90 days of the SAYE plan maturing.
Normal pension rules apply, so the contribution will count towards the annual allowance (£40,000 in 2018-19 – potentially lower if either the money purchase annual allowance or the tapered annual allowance apply, or potentially higher if unused annual allowance can be carried forward) and will need to be within 100 per cent of relevant UK earnings to obtain tax relief.
Capital gains tax
Unlike an Isa subscription, a pension contribution from a maturing SAYE plan is a disposal, and so any gain will be potentially liable to CGT in the same way as if it was simply sold. See Box Four.
It is also possible to transfer share ownership between spouses or civil partners without it being a disposal. The receiving spouse or civil partner will acquire the shares at the original cost price. This means two exempt amounts can be used. See Box Five.
So are SAYE plans a risk-free bet on an employer’s share price? Up to maturity, yes. The employee either receives their money back or they make a gain that is potentially very tax-efficient.
However, if the shares are retained after maturity, the individual is investing in the shares of a single company, which also pays their salary. Risk-free to high risk in a single day.
Phil Warner is head of technical at Hargreaves Lansdown
