Save As You Earn – a smart idea?

Charles Calkin, partner and financial planning consultant

Last month Tesco and BT workers in their employers’ maturing Save As You Earn (SAYE) schemes had a decision to make. It wasn’t a difficult decision.

For three years they had been saving up to £500 a month out of their pay packets into these schemes. Each offered them the chance on the scheme’s maturity to take the cash and use it to buy their respective employer’s shares. They just had to decide whether to take up the offer.

The price of those shares had been set at the launch of the scheme. For Tesco workers this was great news. At that point Tesco had just been rocked by an accounting fraud that meant the share price had plummeted. Even better, the option to buy was discounted by a further 10%. On the SAYE scheme’s maturity they were able to use all their savings to buy Tesco shares at £1.50. Over the three years they’d been saving, the supermarket giant’s share price had recovered significantly, gaining around 75% (at the time the scheme matured the share price was £2.65). Those who’d put away £500 a month were looking at a profit of over £13,000.

BT has also been hit by its own accounting scandal. But that was in 2017 and the share price is yet to recover. So BT staff in the company’s 2015 three-year scheme had an option price of £4.23 a share – nearly £2 more than BT shares were trading at on maturity. Suffice to say it is unlikely any took up the offer.

Recently released figures from HMRC show that there were 11,850 companies operating Employee Share Schemes in 2016/17. SAYE is the most popular format.

These schemes (also known as “sharesave schemes”) can be unpredictable but do not let that put you off investing if you are offered the chance.They can be a very tax-efficient way of sharing in your employer’s success when they work, and when they do not all you lose is the interest or gains you might have earned if you had saved the money elsewhere. Your original capital should be safe and – providing your scheme has been set up properly – should be covered by the Financial Services Compensation Scheme up to normal limits in the event of your employer going bust.

How SAYE works

You save a fixed amount each month into the scheme over a period of three, five or seven years. The money is taken directly from your net wages by your employer, which determines how much you can save – the maximum allowed by HMRC is £500 a month. Once the scheme matures you will be offered the chance to buy shares in the company at the option price, which can be up to 20% below the price those shares were trading at when the scheme began. If the shares have declined in value over the period, you can simply take your cash out.

At present you do not pay Income Tax or National Insurance on the difference between what you pay for the shares and what they are worth, though you might have to pay Capital Gains Tax (CGT) if you sell the shares and they have done particularly well.

A key attraction of the SAYE scheme is that it encourages disciplined, regular saving, though if you suddenly find other financial commitments mean you are struggling you can always withdraw the money you have saved. You can now also take a ‘holiday’ from making contributions of up 12 months before your participation in the scheme lapses. This is a fairly new development – previously you were allowed only a six-month break (unless you were on maternity or parental leave).

Where’s the catch?

Saving into a sharesave scheme will make a lot of sense for many people. Holding on to the shares when the contract matures is another matter. Yes, your company might continue to prosper and the share price might soar, but you could find yourself holding a large portion of your savings in the same firm that is the source of your employment.

We have seen with Northern Rock and Lehman Brothers that big-name businesses do crash and burn unexpectedly. For staff who lost their jobs in those businesses and saw the value of their shares in the company disappear as well, the pain was two-fold.

Holding these shares in perpetuity after maturity therefore represents a concentration risk. It is worth considering selling the shares afterwards and reinvesting the proceeds into a diversified fund or portfolio that is in line with your attitude to risk.

Avoiding Capital Gains Tax

As indicated, if you have significant holdings – perhaps from a series of schemes over a long period of time – you may face the threat of a CGT bill on disposal (and of course there may be transaction costs). You have a number of options.

First, if you are sitting on a large profit and have unused ISA allowance at the time the scheme matures it is worth thinking about using it, transferring all or a portion of shares into your ISA. If you do this immediately you can shelter them from CGT. You can then dispose of this element without triggering CGT. Even if you plan to keep your new shares, it is worth considering putting them straight into an ISA wrapper on maturity of the scheme. You may be able to transfer the shares into your pension too and enjoy similar benefits.

You can also give shares to your spouse or civil partner without it being considered a disposal by HMRC. We each have a CGT allowance – technically it is known as the Annual Exempt Amount. In this tax year (2018/19) it stands at £11,700. That is the amount of profit you can make on a disposal before you have to pay CGT. It means a couple can enjoy gains of £23,400 between them.

You may also consider staggering the disposal of your shares over two or three tax years to avoid paying CGT. Of course, tax rules are always changing so before you do anything check the latest position to ensure you are not going to be landed with a nasty surprise bill.

Charles Calkin

20 Sept 2018

This is not advice and you should not act on the content of this comment without taking professional advice. Opinions and views expressed are personal and subject to change. No representation or warranty, express or implied, is made of given by or on behalf of the Firm or its partners or any other person as to the accuracy, completeness or fairness of the information or opinions contained in this document, and no responsibility or liability is accepted for any such information or opinions.

The value of an investment and the income from it can go down as well as up and investors may not get back the amount invested. This may be partly the result of exchange rate fluctuations in investments which have an exposure to foreign currencies. Fluctuations in interest rates may affect the value of your investment. The levels of taxations and tax reliefs depend on individual circumstances and may change. You should be aware that past performance is no guarantee of future performance.