Offer share plans to help workers become financially resilient
To encourage employees to save more, many companies offer share plans, one of the most popular being Save As You Earn (SAYE).
Employees are invited to save between £5 and £500 per month over a three or five-year period, at the end of which they can then use the savings to buy shares in the company at a fixed option price, often set at a discount of up to 20% of the actual share price at the start of the plan.
In essence, there is no investment risk for the employee as at the end of the period as, if the share price has fallen below the option price, they can receive all of their savings back.
Return on investment
If the share price is higher than the option price at the end of the share plan’s term, the employee will be able to buy the shares below their market value and sell them, enabling them to generate a return on their money.
An SAYE also allows employees to have up to a 12-month payment holiday. Anyone can use this in order to suspend their contributions temporarily, while not losing the right to exercise their share option.
The Share Incentive Plan (SIP) is another popular all-employee share plan enabling employees to buy shares via monthly contributions of between £10 and £150 from pre-tax salary.
Employers may also provide matching shares so that the employee can receive up to two additional shares for each share purchased. Some companies will also use the SIP to gift ‘free shares’ of up to £3,600 in any tax year to employees.
Both SAYE and SIP have attractive tax benefits. With SAYE, any gain realised when selling the shares bought through the plan is free from income tax but is instead chargeable to capital gains tax (CGT).
Gains chargeable to CGT are exempt up to the annual exempt amount, and any gains above this level are taxed at a maximum rate of 20%. With the SIP there is the National Insurance Contribution and income tax saving, as a result of making contributions from pre-tax income.
Tax efficiency
Any gain on shares held in a SIP are also free from income tax and Capital Gains Tax as long as they are held in the plan for at least five years. Tax efficiency can also be maximised by linking shares coming out of a SAYE to an ISA, which can mitigate a participant’s capital gains tax liability.
By linking a SIP to a Self-Invested Personal Pension, employees can supercharge pension savings by effectively benefiting from double tax relief.
A lack of understanding of how a share plan works can be a barrier to employees joining a plan. It also means that employees who do join may not be fully aware of how they can best mitigate any tax charges and use the share plan as a way of boosting their long-term savings.
Supplied by REBA Associate Member, WEALTH at work
WEALTH at work is a leading financial wellbeing and retirement specialist - helping those in the workplace to improve their financial future.
