You can buy shares in your employer’s company, often at a discount and tax efficiently, through workplace share ownership schemes. How do they work and what are the pros and cons?
Save As You Earn (SAYE)
Here you can buy shares in the company you work for. The price of the shares is set when you start saving, not when you come to buy the shares. There are also tax advantages.
- You can save between £5 and £500 a month into the save as you earn scheme.
- The scheme normally lasts for three or five years.
- At the end of the scheme, you earn a bonus. The bonus is tax free.
- You can decide whether to take your money as cash or to use it to buy shares. If you buy shares, you can buy at the price the shares were at when the scheme started.
SAVVY TIP: If the shares have risen, you’ll have made money without taking any of the risk of having invested in the shares in that time. If the shares have fallen, you can take the cash instead. If you take cash, any interest is tax free.
- You don’t pay tax or National Insurance on the difference between the price you buy at and the price the shares reach at the end of the scheme.
SAVVY TIP: You may have to pay capital gains tax (CGT) on the profit you’ve made if you sell the shares, but you can avoid this if you transfer them into an ISA. You have to do the transfer direct (it’s called an ‘in specie’ transfer or ‘re registration’). However, these shares will count towards your annual ISA limit.
Share Incentive Plan (SIP)
This is different to a save as you earn scheme, because you get the shares at the start. This is how these schemes work:
- Your employer may give you the shares. They can give you up to £3,600 worth of free shares in any year (this increased from £3,000 in April 2014).
- Partnership shares: You can buy shares from your salary before tax and National Insurance have been taken off. There’s a limit to how much of your salary you can use to do this: you can only use up to £1,800 a year or 10% of your salary, whichever is lower.
SAVVY TIP: You only get this benefit if you keep the shares in the scheme for five years. If you cash the shares in early, you’ll be charged tax and National Insurance.
- Employer matching: Your employer can give you up to two free shares for each partnership share you buy.
SAVVY TIP: Some employers will match the shares on a 1:1 basis, others will give you two shares for every share you buy.
- Buying shares from dividends: If you receive dividends from your shares, you can use those to buy more shares.
SAVVY TIP: As long as you leave the shares in the SIP until it matures, you won’t have to pay capital gains tax. When the scheme matures and you come to sell the shares, you may have to pay capital gains tax on the difference between the price you bought them at and the price you sell at.
Company Share Option Plan (CSOP)
Here you can buy up to £30,000 of shares at a fixed price. This type of scheme is normally only available to certain employees (typically senior managers).
- You must buy the shares at least three years and no more than ten years after you were given the option to do this.
- You don’t have to pay tax or National Insurance on the difference between the price you buy at and what they are actually worth (as long as you buy the shares 3 – 10 years after you were given the right to do this).
SAVVY TIP: There may be capital gains tax to pay when you come to sell the shares.
What happens if you leave your employer?
If you’ve been offered shares under a Company Share Option Plan and you leave your employer, you may still be able to buy the shares at the fixed price as long as you do so more than three years after you were offered the option of buying the shares and as long as you leave for ‘good’ reasons.
SAVVY TIP: A good leaver is usually defined as someone who leaves because of illness or disability, dies (!), is made redundant or voluntarily retires with the employer’s agreement. A bad leaver is someone who leaves to go to another job or is dismissed.
Enterprise Management Incentives (EMI)
These share schemes are offered by smaller companies (those with assets of £30 million or less).
- You can buy up to £250,000 of shares. This limit is set as the market value on the date you are granted the option to buy the shares.
- You don’t pay tax or National Insurance on the difference between what you pay for them and what they’re worth.
- You may have to pay capital gains tax when you come to sell them.
SAVVY TIP: Not all companies are able to offer EMIs. Banks, farms, property developers, legal services and ship builders are not allowed to offer them.
Employee Shareholder Shares (ESS)
- You can be given or buy shares in your employer’s company. Your employer may choose to give you shares to incentivise you.
- In order to be classed as an employee shareholder, you must have at least £2,000 worth of shares (they must have been worth this when you bought or acquired them).
- The first £2,000 worth of shares will be free of tax and National Insurance.
- You won’t have to pay capital gains tax on up to £50,000 of employee shareholder shares when you come to sell them.
SAVVY TIP: Be aware that if you are classed as an employee shareholder, your employment rights will change. You don’t have the right to request flexible working, to statutory redundancy pay and you have reduced protection against unfair dismissal. You can read more about your rights as an employee shareholder on the Gov.uk website.