How SAYE share plan savers can avoid an unnecessary tax bill

Employees may have spent years investing into your organisation's share saving plan, helping them with the tax implications at the point of maturity is essential

Many companies in the UK operate a ‘save as you earn’ (SAYE) share plan, which offers employees a tax efficient way to invest in their company’s shares.  Many of these are due to mature in the coming months and years, with some people likely to have doubled, or even tripled the amount of money they saved due to favourable market conditions since the pandemic. However, without expert guidance, many participants may not understand their options once their share plan matures and could be at risk of paying unnecessary tax.

Jonathan Watts-Lay, Director, WEALTH at work, says: “SAYE plans can be an attractive way for employees to invest in their future. These plans run for three or five-year terms, and participants can decide how much to save each month (up to £500 a month).  At the end of the plan’s term, if the share price has fallen, individuals can receive all their savings back. If the share price is higher than the fixed price agreed at the start of the plan, individuals can use their savings to buy shares and realise any returns.

“We are now at the start of a two-year window where a lot of SAYE plans are coming up to maturity and many will have big gains. This is because in 2020 when markets fell, share plans that launched generally had a low share price at inception. On top of this low starting share price, many companies also offered a discount, giving employees a particularly low fixed price at the start of the plan. As a result, a lot of people will be able to potentially double or even triple the money they saved.

“However, whilst a financial windfall may seem like a dream to most, participants need to be well informed to make the right decisions as to whether they should sell shares or continue to hold on to them. Participants should also understand the value that dividends may provide in the future and the importance of diversifying their investment and not putting all their eggs in one basket.”

Reducing the tax hit

“For those who are thinking about selling their shares, it’s important to understand what they can do to reduce, or even eliminate a potential capital gains tax (CGT) charge,” Watts-Lay says.

“CGT only has to be paid on overall gains that exceed the CGT allowance, which has now reduced to £3,000 from £6,000 for the current tax year. Where gains from a SAYE plan exceed the available allowance, CGT is charged at 10% if the gain falls within the basic rate tax band, or 20% for anyone who pays tax at a higher rate. There are, however, a number of ways of maximising tax allowances to help reduce or eliminate a CGT charge.”

Tips to help reduce tax liability and charges

Transfer to an ISA within 90 days

Shares can be transferred directly from certain share plans into an ISA up to the value of £20,000 each tax year. However, while there are many ISA providers on the market, only a small number accept transfers from an employee share plan. This is known as an in-specie transfer. Sometimes people look to sell shares and repurchase them within an ISA so they grow tax free in the future, however unlike an in specie transfer, this will create a capital gains tax charge (assuming gain for year is above £3,000) as the shares have been sold.

Shares must be transferred within 90 days of the date that an individual exercises their options to buy shares from a SAYE plan for this route to be available. The transfer is then not a chargeable event for CGT purposes. They can then sell their shares immediately free of CGT, or keep them in the ISA, which is useful for those considering holding shares, sheltering future returns from tax, or diversifying their shareholding into other stocks and shares.

Spread the sale of shares over two tax years

The CGT allowance is available to individuals each tax year which runs until 6 April. While the limit was £6,000, it was reduced to £3,000 from 6 April 2024. If a participant realises a gain of £3,000 this tax year, they could hold on to the remaining shares and sell a further amount to make use of the £3,000 CGT allowance in the next tax year. However, if the value of the shares fell during this time, this could reduce the overall return.

Transfer to a spouse or civil partner

Those at risk of breaching the capital gains tax allowance limit could transfer some shares to their spouse or civil partner to benefit from any unused CGT allowance. They must be married or in a civil partnership for this option to apply.

Bring these strategies together

Those with larger gains may benefit from combining the strategies above. For example, an individual who saved £12,000 into a share plan with an option price of £1 would be able to buy 12,000 shares at maturity. If we assume the share price at maturity has risen to £2.69, their shares could be worth £32,280 at maturity, meaning they have a gain of £20,280. Selling all these shares at once and using only their own £3,000 CGT allowance could lead to a tax charge of £3,456, or half this amount if the gains fall into the basic rate tax band. Combining the above tax planning strategies could potentially reduce their tax charge to zero.*

Watts-Lay adds that SAYE plans are used by many companies to motivate and reward their hard-working employees, as well as help them to build their financial resilience. “It is a low-risk way to save for the future, with the possibility of a very good return on investment.

“We have worked with many organisations with share plans to provide their employees with financial education and guidance, as well as access to a workplace ISA to protect any gains from capital gains tax, and investment advice for those with complex circumstances. This ensures participants understand the benefits of taking part and what steps they need to take when their plan matures.”

For example:

The tax charge could potentially be reduced to zero by taking the tax planning measures outlined below. In this example the employee has 12,000 shares valued at £32,280 which includes a gain of £20,280.

Transfer 7,434 shares to an ISA within 90 days of exercising the share option and sell the shares within the ISA (7,434 shares X £2.69 = £20,000) The ISA allowance has been used and 4,566 shares remain.

Sell 1,775 shares making use of the employee’s CGT allowance (1,775 shares X £1.69 capital gain = £3,000 gain realised). 2,791 shares remain.

Transfer 1,775 shares to the employee’s spouse/civil partner and make use of their CGT allowance. 1,016 shares will then remain.

Hold the remaining 1,016 shares until the 2025/26 tax year when they can be sold, making use of the new £3,000 CGT allowance.

Gains are taxed at your marginal rate, meaning some basic rate taxpayers may pay gains at 10% and 20%. Shown as a guide only and figures are rounded for illustrative purpose. The share price is likely to vary at the point you sell your shares. Your tax charge will be different if you have other chargeable gains in the same tax year.