Sharesave Schemes

Posted:Abigail Andrews – Tuesday, June 26th, 2007

If your employer offers an employee share scheme you should seriously consider signing up. It can help you build up a nest egg and most are risk-free. Sharesave schemes offer a low-risk, tax-efficient and potentially very profitable way of boosting your savings. So if your employer offers a sharesave scheme and you're not a member, it's worth reading this to find out why you should join.

What are Sharesave Schemes?

The sharesave scheme is also known as the Save As You Earn (SAYE) or Savings-Related Share Option Scheme. Introduced under the 1980 Finance Act, it is currently the most popular of the all-employee share schemes. Sharesave is an arrangement under which an employee has the 'option' to buy shares at a future date, at a price set when the scheme first begins, and a company can discount this price by up to 20% off the market value at this time.

Share save contracts are 3 or 5 years long. The 5 year option can be extended to 7 years at the end of the 5 year term, but savings are only paid into the scheme by the employee over the 5 year period. Shares can only be purchased with the proceeds of savings made under the SAYE scheme. The employee decides at the begining of the scheme how much he/she wants or can afford to contribute every month. This set amount is then taken from the employees net salary every month and sent by the employer to a savings account set up for the purpose of the scheme.

All schemes are driven by the HM Revenue & Customs, meaning interest rates and tax breaks are the same, whichever company you work for.

Savings and Share Option Contracts

The sharesave scheme consists of 2 parts:

Savings Contract

Tax free account held with a bank or building society. Employees are allowed to save between £5 - £250

Option Contract

A company allows the employee to buy shares for a fixed price with the money saved in the savings account at the end of the term (3, 5 or 7 years). Also, at the end of the term, if no payments have been missed a tax free bonus is added, at the same point a six month window begins where the employee can decide whether all or some of the savings will be used to purchase shares.

Leaving a Sharesave Scheme

If you decide leave the scheme before it matures, the money you've saved will still be repaid. Also as long as you have been saving into the scheme for more than 12 months, you'll also be entitled to any accrued interest on your savings, but you will no longer be entitled to the share option. This interest is usually at a low rate though.

If the employee misses more than 6 monthly contributions, then the savings contract is deemed to have been closed, savings would automatically be returned to the employee. The option to purchase shares would also end.

Sharesave Limits

As mentioned above, there is a minimum savings amount of £5 per month, and a maximum of £250 per month. You could choose to start a contract for 5 years and put your maximum allowance in it immediately or you could decide to split your allowance across a number of schemes over a number of years.
For example:
Year 1 £50 for 5 years.
Year 2 £100 for 3 years.
year 3 £100 for 5 years.
However, you can only have a monthly maximum of £250 invested at any given point.

Contract	Monthly Savings	Bonus	Interest
3 year	36 payments	1.8 x monthly contributions	3.19%
5 year	60 payments	5.5 x monthly contributions	3.46%
7 year	60 payments	10.3 x monthly contributions	3.52%

The rates quoted are effective from 1 September 2006, these can change on a yearly basis so you will need to refer to your company's sharesave scheme documentation for the latest rates.

Here is a worked example:
If the term is:  5 years
Market share price at Date of Grant:  £2
Option price with 20% discount:   £1.60
Market share price at maturity:  £5
Amount invested per month   £50

Savings
Total savings at completion (60 months x £50)	= £3000
At maturity the tax-free bonus is added (5.5 x £50)	= £275
Total savings and bonus	= £3,275
Option
Number of shares under option (£3,275 / £1.60 )	= 2,047
Value of shares at maturity (2,047 x £5)	= £10,235
Increase in value (£10,235 - £3000)	= £7,235
% gain on original savings (£10,235 / £7,235 x 100)	= 141.5%

Sharesave: A win-win situation

If the above calculation has not convinced and tempted you that employee sharesave schemes are win-win then here are three other reasons:
1) If the share price plunges, you don't have to exercise the right to buy the shares. There's no risk attached until the shares are actually bought.
2) At maturity you still are not obliged to buy shares; you can just take the cash and bonus.
3) The scheme can help you to save, as the money goes straight out of your salary on pay day every month. You cannot get access to the money unless you cancel the scheme therefore, no dipping in for that nice pair of shoes you have seen!

The only real risk of losing money is if you are unlucky enough to give an instruction to buy shares at the same time as the share price falls. If you remain employed up until the scheme matures and the market value has risen above the option price, you may want to buy shares and then sell them immediately to reap your profit straightaway. However, something to bear in mind is piling all your savings into your employer's shares without selling soon after could be a risky strategy - particularly if it's your only stockmarket investment or you have a lot of money tied up in the scheme. If the company runs into trouble it could be your savings as well as your job that's on the line.

Sharesave Scheme Eligibility

The scheme has to be open to all eligible employees of the company. However, a qualifying period of employment can be set but this must be no greater than 5 years.

Sharesaves and Tax

Income Tax

There is normally no tax to be paid when an employee purchases the shares. However, in the event of an early exercise of options (resulting from the Company being taken over or the business being sold) within 3 years from the date of grant, the employee may have to pay income tax on any gain.

Capital Gains Tax

When you exercise your shares you maybe subject to capital gains tax on the profit you make, this being the difference between the sale price (bought for) and the exercise price (sold for). The rate of CGT depends on your tax rate, wether you are paying basic rate tax or higher rate. Any gains less than the specified amount which in 2006 was £8,800 are free from Capital Gains Tax.

For example:

• Amount invested in savings and bonus at the end of your sharesave term £3,275 (Not subject to CGT)
• Capital gains allowance £8,800 per year(Year 2006)
• Plus any costs of buying and selling the shares (e.g. stamp duty on purchase and brokers commission)
• Total CGT free £12,075
• Any profit over and above £12,075 in that year is subject to Capital Gains Tax. Check the allowance for your tax year at the HM Revenue & Customs website.

If you do go over your allowance, you can sell up to your tax free limit and leave the rest in shares until the next tax year. If you decide to hold on to your shares, you need to keep an eye on the share price as your profits will be eroded if it starts to slide.

Share saves and Dividends

Until your sharesave matures and you actually purchase shares with your savings you do not qualify for dividends.

A little bit of sharesave advice...

If you opt to buy shares through the plan every few years, it's a good idea to keep selling them. Leaving your shares in a company to build up leaves you open to the risk of the share price falling, capital gains tax, and the risk of the company going under. Take your profits regularly and invest elsewhere or, if you have any debts, clear them off and use the money to plump up your pension. For many people, paying off a chunk of their mortgage is a great way to invest the cash.

Popularity: 10% [?]