Investing Basics: Save as You Earn and Share Incentive Plans

Save as You Earn (SAYE) is a government scheme that helps people to buy shares in the company they work for, allowing them to save between £5 and £500 each month – writes Christian Leeming

 
Share Incentive Plans (SIP) allow employees to buy shares in their company in a tax efficient way or be gifted shares by their employer.

For many this may be an introduction to share ownership in a low risk way and it comes with attendant benefits in terms of motivation and staff retention for the employer.

SAYE (sometimes ‘Sharesave’) schemes allow the individual to save over a set period of time – typically three or five years – with contributions deducted at source.

At the end of this period, the employee receives a lump sum bonus and is able to purchase shares in the company at the ‘option price’ which typically represents a discount of 20% off the share price at the start of the scheme.

‘the ‘option price’ which typically represents a discount of 20% off the share price’

If in the interim the company’s share price has fallen to the point where the option price is actually higher than the market price, the employee receives the sum of their investment with a bonus.

You may cancel your plan and have your savings returned at any time although the opportunity to buy shares goes with it.

SIPs allow the employee to purchase shares out of gross earnings thereby avoiding income tax and national insurance on the amount of their investment.

When an SAYE scheme matures you do not pay any income tax or national insurance contributions on the difference between the option price and the prevailing market price.

Some schemes then facilitate the transfer of these shares into an ISA wrapper to preserve the tax benefit and to provide the foundation for a diverse investment portfolio.
 

SAYE in Action

 
Tesco staff that joined a recently matured SAYE scheme received an unexpected 88% return in the bagging area.

Those saving £50 a month for the five year duration of the scheme received a payment of around £5,600 based on the amount invested, multiplied by the gap between the option price of 195p and Tesco share price on maturity; this return was delivered over a period in which the FTSE 100 dropped 5%.
 

Are There any Risks Attached?

 
If the share price falls below the option price the employee can choose to take a lump sum representing the return of their investment plus a cash bonus so any risk is based upon the strength of the company or the potential loss of interest as bonus rates are typically in decline on such schemes.

If you employer goes bust, your SAYE money could vanish, leaving you unemployed and with a big hole in your savings; however, you are covered for losses up to £50,000 under the Financial Services Compensation Scheme (FSCS).