A guide to Sharesave schemes

Staff are often encouraged to own shares in their employer so they can benefit from all their hard work beyond simply collecting a salary.

A lot of people like the idea of owning a small slice of the company where they work. If the company is successful, they could be rewarded by the value of their investment going up. Employees often buy stock each month as part of a company share scheme or they are rewarded with shares as part of a bonus package.

Read on to learn about the different types of share schemes available and what you might need to do once your scheme matures, such as transferring the shares into a Stocks and shares ISA and shielding your gains from the taxman.

What is a Save As You Earn scheme?

A Save As You Earn (SAYE) scheme (also referred to as a Sharesave scheme) is a way for employees to buy shares at a fixed price. You can set aside up to £500 a month from your salary and pay into a scheme that runs for either three or five years. Once this term is up, the money in the scheme is used to buy shares at the pre-determined price.

The goal is to have the shares trading at a higher price when the scheme matures versus the price agreed at the start of the Save As You Earn scheme, meaning you can buy at a discount. If the market price is lower than the SAYE price, you aren’t forced to buy the shares. In this situation, you can simply allow the scheme to lapse and withdraw the cash.

What are my options once the SAYE scheme ends?

There are four options to consider with some or all of the money you’ve saved up in the Save As You Earn scheme once the three or five-year term ends:

1. Buy and sell – Assuming the company’s share price on the stock market is greater than the price at which you can buy the stock through the SAYE scheme, you can use the money saved to buy the stock and then immediately sell it. You may have to pay capital gains tax (CGT) on the profits.
2. Buy and transfer – You may choose to keep the shares. The government says you have 90 days from the end of the scheme to transfer the shares to a Stocks and shares ISA to avoid paying capital gains tax. If you don’t transfer within 90 days, you’ll have to sell your shares and repurchase them in your ISA or pension, and any profits may be subject to capital gains tax. Some people find that they don’t have an ISA or SIPP when their share scheme matures – so it’s important to think ahead and consider opening an account with a platform such as AJ Bell, to hold your shares and let them grow in value.
3. Buy and keep – You can buy the shares and hold them in a standard investment account, also known as a Dealing account, rather than an ISA or pension. Be aware that any dividends from the shares would be subject to income tax, and any profits when you sell would be subject to capital gains tax, after accounting for personal allowances.
4. Do not buy and have the savings returned as a cash lump sum – You may wish to choose this option if the shares are trading below the exercise price when the scheme matures.

Do I pay tax on Save As You Earn shares?

There’s no income tax or National Insurance payable on the difference between what you pay for the stock and what it’s worth once the Sharesave scheme reaches the end of its three or five-year term.

You won’t have to pay capital gains tax if you transfer the shares at the scheme’s maturity to an ISA within 90 days of taking them out or immediately to a pension.

What is a Share Incentive Plan (SIP)?

A Share Incentive Plan (SIP) is an alternative way for employees to obtain shares in the company where they work. Individuals either buy the shares through different means or they receive them for free as part of their remuneration package, such as through a bonus scheme. SIP shares are held in a special investment account arranged by your employer until you request a withdrawal.

There are four ways to obtain shares in the plan:

1. Free shares: Your employer can choose to give up to £3,600 of free shares in a tax year.
2. Partnership shares: This is a tax-efficient way to invest in your employer. You can buy shares each month out of your salary before tax deductions, up to a limit of £1,800 or 10% of your income for the tax year, whichever is lower. Some employers might use the term Buy As You Earn (BAYE), which is another name for partnership shares. Your employer might let you change the amount you buy each month, giving you flexibility over how much you invest.
3. Matching shares: Some companies like to incentivise staff to invest. Your employer can give you up to two free matching shares for each partnership share you buy.
4. Dividend shares: You may be able to use the money you receive from dividends in the Share Incentive Plan to buy more shares in the scheme. It’s up to your employer whether they offer this option or not.

Do I pay tax on Share Incentive Plan (SIP) shares?

Shares obtained through a Share Incentive Plan are not subject to income tax or National Insurance if you keep them for five years. Capital gains tax is not payable if you retain the shares in the plan up to the point of sale, transfer the shares to an ISA within 90 days of taking them out of the plan, or transfer them to a SIPP.

If you don't transfer your shares to a pension immediately when the SIP scheme ends, you can still transfer them up to 90 days later. You may have to pay capital gains tax if they go up in value between when you buy them and when you transfer them.

If you keep the cash from any dividend payments from the scheme, you’ll be subject to normal rules on income tax. You don’t pay income tax on additional shares bought using dividend payments from the scheme, provided the dividend shares are kept for at least three years.

Is there a time limit for holding shares in a Share Incentive Plan (SIP)?

No, there isn’t. Unlike a Save As You Earn Scheme, the shares in a SIP don’t mature, and they can be kept in the plan for as long as you work for the company.

Can I transfer my shares out of a Share Incentive Plan to an ISA or SIPP?

You can take your shares out of a Share Incentive Plan at any time to sell or to transfer to an ISA. AJ Bell does not permit transfers from a Share Incentive Plan to a SIPP.

It’s important to understand the tax rules. If you’re selling the shares, you may need to pay income tax and National Insurance on the value of your shares if you’re leaving the plan within five years of buying them, or if you get a job with a different company within this period. After five years, you can sell them without paying any income tax or National Insurance.

If you want to keep the shares and transfer them to an ISA, you may need to pay capital gains tax. Further details are available above. The price for shares withdrawn from the plan will be the market value on the date they are withdrawn.

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