November 26, 2012 12:30 am

Share schemes lose their attraction

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Red tape and out-of-date rules have prompted the number of UK companies offering ordinary employees Save As You Earn share option schemes to fall by 15 per cent in one year.

SAYE schemes allow employees to invest in the company they work for, at a discounted price. Nick Clegg, deputy prime minister has repeatedly called for increased employee share ownership, and has put forward ideas for a “John Lewis economy” in which staff will own stakes in the firms they work for.

But experts say SAYE schemes have floundered in recent years thanks to corporate cost-cutting and the removal of key incentives for employees to use the scheme by HM Revenue & Customs (HMRC).

UHY Hacker Young, the national accountancy group, has revealed that just 510 companies offered SAYE schemes to their employees in the 2010-11 tax year, down from 600 companies in 2009-10, and less than half the 1,110 companies that offered schemes in 2000-01.

“The government is supposed to be encouraging employee ownership, but these figures show one of the key avenues to employee ownership is rapidly withering,” said Roy Maugham, tax Partner at UHY Hacker Young.

“SAYE schemes have historically been one of the best ways to encourage employees to invest in their employer – they can make investments both cheap and financially rewarding.”

SAYE schemes allow employees to build up monthly savings over three, five, or seven years, usually via deductions from payroll after tax. After the savings period, they can withdraw the cash, or use it to buy shares in the company at a discounted price fixed at the start of the plan. The discount can be up to 20 per cent off the current share price.

However, HMRC has been quietly reducing the rate employees receive on money put into share-saving schemes for some time. It has cut the interest rate on seven-year share save schemes to 0 per cent, down from the previous 0.58 per cent. Five years ago, the interest rate for a three-year SAYE scheme was 4.23 per cent.

“These schemes are now too expensive for employers and not attractive enough for employees,” said Maugham. “Zero per cent interest rates mean employees lose a lot of their investment through inflation if share prices fall below the price they’ve agreed to pay for them.”

Experts say demand for SAYE schemes could be boosted if interest rates and the cap on monthly savings for employees were increased or if the discount available on shares was increased to protect share purchases against large falls in share values.

In support of this a number of MPs have signed an early day motion calling upon David Gauke, treasury minister, to increase the amount of money that employees can save in these HMRC-approved all-employee share plans. The monthly maximum SAYE savings limit of £250 per employee has not increased since 1991.

John Whiting, tax director for the Office of Tax Simplification which looked at these schemes in detail earlier this year, said these schemes can benefit employers and added that there is a real need for the government to “reinvigorate and support” SAYE plans.

“The simple question is are they worth it?” he said. “The answer is yes, and there is scope for a relaunch – one that focuses on making SAYE schemes more attractive, both to employers and employees.”

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