Share investment schemes run by employers are normally an excellent way to save. Many employees don’t sign up and are missing out on the chance of big profits.
The most popular scheme is Sharesave, the scheme whereby you save from £5 to £250 per month over 3 or 5 years. At the end, if the share price is low, you can take the cash, with an annual interest rate of about 4%; but if the share price is higher than the price set at the start of the scheme – which is usually at a 20% discount to the then market price – you can take the shares.
There’s no income tax or national insurance, but if your profit on selling the shares is over the annual gains tax allowance (£9,600 this year) you may pay capital gains tax at 18% on the profit. But you can sell the shares over several years so that your profit never exceeds this annual threshold and therefore pay no tax even on much larger gains.
Sharesave worth a punt
Sharesave has been running since 1991 and there are currently 2.3 million people saving in the scheme. Almost all the UK’s top 100 companies are among the 940 firms that operate Sharesave schemes and if you are eligible, it’s certainly worth thinking about signing up – especially now, with share prices at bargain basement levels.
ifsProshare, the body that promotes these schemes, is urging the government to increase the monthly limit, which hasn’t changed since 1991 and would, it says, be over £400 today if it had risen in line with inflation.
When your Sharesave plan matures, you can if you wish transfer the shares into an ISA so that your dividends, and any further gains, will be free of income tax and capital gains tax.
Consider SIS
The second most popular share saving scheme with tax breaks is the Share Incentive Scheme (SIS), operated by 760 companies including many smaller firms. Smaller employers like it because the scheme allows them to give free shares depending on employees’ performance.
Employees can buy up to £1,500 worth of shares each year and employers can give free shares worth up to £3,000 on a ‘2 free for one bought’ basis. Once the shares have been held for 5 years the proceeds are free of income tax and national insurance.
You may be liable to capital gains tax if your profits on selling shares exceed the allowance in any one tax year. With SIS, the risk is greater than with Sharesave because you own shares from the start and if the company does badly, you may lose.
Some alternatives
These two tax-break schemes account for the vast majority of people actually saving. But two others - the Share Option Scheme and the Enterprise Management Incentive Scheme (EMIS) – hand out tax breaks worth almost half as much as the £820 million annual cost of Sharesave and SIS to a handful of fat cats at 11,000 small private businesses.
They provide tax breaks worth tens or hundreds of thousands of pounds apiece to directors and senior employees. EMIS was one of those New Labour business-friendly initiatives (translation: bribes) that helped the Labour government cosy up to business organisations back in 2000 but whose benefit in terms of fostering entrepreneurship is extremely dubious.
Over the years I’ve met many people who have made big gains from Sharesave schemes – and I do mean big, like £20,000 to £30,000. If you do two successive 5-year plans with a successful company, you can make that kind of profit. Of course there is a risk – the company may do badly and the shares end up being worth little.
But with Sharesave, you can take the tax-free interest at maturity instead of the shares and end up earning a bit less interest on your savings than you would have done in a normal savings account. So the downside here is really very limited indeed. And starting when share prices are low makes good returns more likely.
