PERSONAL FINANCE Each year, millions of employees take part in workplace schemes which allow them to buy equity in their company, often at a discounted price. These Save As You Earn (SAYE) schemes are the most popular employee share plan in the UK and can be an excellent low risk way to build up a stake in your employer.
How does SAYE work?
SAYE is also known as savings related share option schemes. These are plans set up by an employer under which employees are given a right, or option, to buy a certain number of shares in the company at a fixed price at a fixed date in the future.
The sweetener is that the fixed price can be discounted by up to 20 per cent of the market value of the shares at the time. When the scheme matures, in either three or five years, employees have the option to buy shares at the fixed price agreed at the beginning of the plan or take their savings in cash. You can only buy the shares using cash saved under a special SAYE contract.
Why are they sometimes called “no lose or no risk” plans?
If your company’s shares fall in market value by the time your plan matures you make a paper rather than actual loss. This is because you still have the option to take your savings in cash, plus any bonuses or interest which are tax-free. This is a safety net you would not have if you had invested directly in the stock market.
What are the tax advantages?
If you get a share option under a Revenue-approved SAYE scheme, you do not have to pay income tax or NIC when you receive your option or, in most circumstances (see below), if you make a gain on your shares when you sell. However, you may be liable to capital gains on disposal of your holding. But don’t forget your annual CGT allowance (£9,200 in the tax year 2007/08) and taper relief will ease any tax burden.
Can anyone join?
Yes, SAYE schemes are open to all staff from the shop floor to directors as long as they are UK employees. However, your employer may limit participation to those with a specific length of service. Plans are normally open once a year.
Are the shares the same as those held by mainstream investors?
The shares must be part of the ordinary capital of the company, meaning you will have the same rights to dividends and bonus payments as other shareholders. However, as you will only formally own shares once you have exercised your option, you are only entitled to shareholder benefits such as dividend payments after you have exercised your option.
How does the savings plan work?
You can save between £5 and £250 per month for a fixed period of either three or five years (36 or 60 monthly contributions). The money is deducted straight from your pay packet and put into a special Save As You Earn contract, set up with a bank or building society.
If you have a five-year plan, you will also have the option to leave your savings in your account for another two years, without making further contributions. You would get a more generous bonus for doing this. After you have signed up, you can’t change the amount you save each month.
What is the bonus?
The bonus is equivalent to interest and this is set by the Treasury, not the bank or building society. Currently, the three-year bonus is equal to 1.4 months’ contributions; the five-year is equal to 4.4 months’ payments and the seven-year bonus, 8.4 months’ payments. The bonus rate changes annually but what you have at the start applies for the whole period of the contract.
What happens if I want to stop saving?
You can delay the payment of up to six monthly contributions in total. But if you fail to make a payment on the due date for a seventh time then this will result in your contract being terminated.
What if I want my money back before the contract ends?
You can do this but if you have saved for less than a year you won’t get any interest or bonus.
What if I leave the company before the plan matures?
If you left your job due to injury, disability, or if you were made redundant or retired, your rights will be preserved but you only have about six months to exercise your option from the date you left the company. If you leave for any other reason, it will be down to your scheme whether they will allow you to exercise your options.
What if my company is taken over or sold?
Some plans may allow you to exercise your option before it matures in these circumstances. However, if you do this within three years of receiving your option, you may have to pay some income tax on any gain.
What if I don’t want to sell? What else can I do with my shares?
You can do a number of things, including transferring them into an Isa provided your Isa manager allows it. The calculation for your Isa limit is equal to the value of the shares at the date of transfer. You could also transfer them into a registered pension plan, but this must be done within 90 days of exercising your option.
More information about these schemes is available from Employee Share Ownership Centre (www.mhcc.co.uk/esop) and IfsProShare (www.ifsproshare.org)
