Employee share schemes – what are they and how do they work?

7th September 2015

Jonathan Watts-Lay, Director, WEALTH at work, a leading provider of financial education, guidance and advice in the workplace discusses employee share schemes on Share Radio along with other financial experts.

The panel discusses different types of share schemes such as Save As You Earn (SAYE) and Share Incentive Plans (SIPs). Watt-Lay describes SAYE schemes as a ‘great savings vehicle’ and that the advantage of them is that they allow individuals to buy shares with the ‘benefit of hindsight’.

Watts-Lay also outlines the key things to think about with maturing SAYE schemes, “If you are going to hold the stock, how are you going to hold it tax efficiently? Also think about diversification, which is about not having all your eggs in one basket.”

He continues by describing how SAYE schemes can be managed so that they are tax efficient. “Everyone will have a Capital Gains Tax (CGT) allowance every year so they could sell some shares up to the CGT [allowance]. But one of the things people don’t realise is if you transfer these shares within 90 days into an ISA, in addition to your annual CGT allowance, you can also transfer (up to the ISA allowance which is currently just over £15,000) shares without any CGT charge. So, you could take the money out of your ISA the following day if you wanted to spend the money. A lot of the work we do at WEALTH at work as an organisation is very much about getting employees to understand that even if they want to spend the money, they can do it in a tax efficient way.”

Watts-Lay also discusses how SIPs work and how they differ from SAYE schemes. “You get tax and national insurance (NI) relief, which you don’t get on SAYE schemes. Secondly you’re buying the shares on day one. With SAYE schemes you are saving into a savings account effectively, where you may buy [the shares by exercising the option normally] 3 or 5 years down the road. But with these schemes [SIPs], you are buying them on day one. However under the rules, the employer can match the contribution into the scheme [up to 2 for 1]. So even though you are buying shares on day one (so obviously you are exposed to the fluctuations in that share price), you’ve got a lot of down side protection because you would have got the tax and NI relief and quite possibly your employer has matched, so you’re in a pretty good position even if those shares were to fall a little bit.”

Watts-Lay continues by explaining that employees should keep their shares in the SIP for 5 years to maximise the tax efficiency. “If you don’t and you sell them earlier, then HMRC will claw back some of that tax and NI relief that they have given you. But once you have held them for 5 years, you’ve got them to do whatever you want – and again you can do some very tax efficient things. For example, you could pay them into a pension. And the interesting thing about SIP plans is that you can effectively get two lots of tax relief on the same money because you will get tax relief when you originally make the contribution into the SIP… If you then decide 5 years down the road that you want to start paying some of the contributions into a pension, you will get another lot of tax relief because it’s a pension contribution. So SIPs are slightly different to SAYEs because you have the risk from day one (because you own the shares from day one) but they are actually very tax efficient.”

Watts-Lay also discusses that employees should determine whether their overall saving strategy is short, medium or long term to decide on the most suitable saving method. “Think about your short term, medium term and your long term savings and what your company may be able to offer you. Long term is usually quite straight forward because it’s normally the pension. Short term could be the SAYE scheme, as it’s basically cash until you decide to exercise it – if indeed you do – and if you don’t, you just get your money back, so that’s great for short term savings of maybe 3 or 5 years. The medium term is that SIP, when you are buying shares straight away but you need to take a slightly longer term view of it.” He also expresses caution, explaining that SIP shares purchased could go down as well as up.

He continues, “So if all of these things were equal and you could afford £300 a month, you could just probably put £100 in each of those [pension, SAYE and SIP]. But of course, people will have different personal objectives. So maybe if you are a younger person, actually what you are really looking to do is save for a deposit, maybe for a flat. In which case you may be more tempted towards SAYE. As you get older and your objectives change, you may change that balance.”

To listen to the full discussion, please click here.

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