What they are, how they work and the pros and cons of joining them
Sharesave schemes let you save directly from your paypacket, then give you the option to buy shares in your employer at the end of the scheme. The idea is that you get the opportunity to take part in the success of the company you work for. Best of all, there's no risk to your cash as you can get every penny saved back if you don't end up buying the shares. Yet, sharesave isn't right for everyone - this guide helps you decide if it's for you.
What are sharesave schemes?
Sharesave schemes, often known as Save As You Earn (SAYE) or employee share ownership schemes, were first introduced in the UK in 1980. They let you save regularly through your employer's payroll over a three or five-year period, and then give you the choice of taking every penny of your savings back, or using the cash you've put aside to buy shares in your employer.
To take part in a sharesave scheme, your company needs to be a public company listed on a stock exchange, such as the FTSE, or needs to be owned by a public company that's listed on a stock exchange.
More than 14,000 companies in the UK, such as Asda, BT, Next and Tesco operate a sharesave scheme, and latest figures show more than one million people in the UK are part of one of these schemes.
What are the advantages of joining a sharesave scheme?
The main advantages include:
- Saving is risk free - at a minimum you get back every penny you put in. At the end of the scheme, you have a choice of what to do with the cash. If it wouldn't make financial sense to buy the shares (more on this later) then you can just take your savings back as cash. Yet, while you can't lose money in a sharesave scheme, there is a cost, in that you'd have missed out on the interest you'd have got if you'd saved elsewhere.
- Savings are taken directly from your paypacket. This is an advantage if you find it difficult to save, as the money never goes in to your bank account, so you can't be tempted to spend it rather than save it.
- You could make a profit in the £1,000s or even £10,000s. While most companies won't experience rapid growth in their share price during the period of the sharesave scheme, there's always a chance that your company will. Even doubling your money in these schemes isn't unheard of.
Are there any reasons I shouldn't join a sharesave scheme?
These are best if you're on a financially secure footing and have disposable income to spare. So, it may be best to focus cash elsewhere in a few circumstances:
- You have expensive debts. If you're paying interest on credit cards, loans or overdrafts, for example, then it'll usually be better to focus your spare cash at paying those off, rather than saving in to a sharesave scheme.
- You don't have any spare income at the end of the month. If you spend everything you earn, then devoting cash to a sharesave scheme may mean you need to turn to credit to make ends meet. If you do want to join your employers scheme, see if you can do a Money Makeover to cut your spending.
- These would be your only savings. While you can choose to stop paying in to the scheme, or leave the scheme and get your money back at any point, you may want to keep a certain level of emergency savings more accessible, as it can sometimes take a few days to get your cash returned to you.
However, if you're debt free apart from your mortgage, or your debts are at 0% interest and are manageable, you have spare cash at the end of the month and you have a separate emergency fund, then you may want to consider joining your employer's sharesave scheme - though, as always, weigh it up against saving or investing elsewhere.
How do I join my employer's sharesave scheme?
A couple of months before the sharesave scheme starts your employer, or the bank, building society or share administrator it organises the scheme with, will contact you with an invitation for you to join the scheme. It's completely voluntary whether you want to join or not. The invitation to join the scheme should have details of:
- How long the scheme runs for. Schemes run for either a three-year period or a five-year period. Some employers will decide this for you, others will offer both and let you choose.
- How much you can save each month. Sharesave scheme rules let you save any amount between £5 and £500 per month (though your employer can specify a larger minimum or smaller maximum).
Do note the £500 maximum applies across all sharesave schemes you are currently paying in to, so if you choose to contribute £500 per month when you first join a sharesave scheme, you won't be able to contribute to the next year's scheme.
- The 'option price' for the shares. This is set at the start of the scheme and is how much you'll pay per share if you choose to buy shares when the scheme ends. Sharesave schemes allow employers to discount shares by up to 20% off the market price on a set day before the start of the scheme. An example may help here...
Company X runs a sharesave scheme. Shortly before the scheme is due to start, its shares are worth £3 each. Company X chooses to discount its shares by 20% for employees taking part in sharesave, so it sets that year's 'option price' at £2.40.
- The deadline to sign up. Don't miss this deadline or you won't be able to sign up to that year's scheme.
You'll pay the same amount each month, and the idea here is that you're building up the savings that you can choose to use to buy shares once the scheme period is over. Here's how much you could have saved at different levels of monthly savings over three and five-year schemes:
|Amount saved per month||Total saved after 3-year scheme||Total saved after 5-year scheme|
It's worth noting you can't add more cash in to the scheme than the monthly amount you opted for when you signed up (though you can choose to also take part in sharesave schemes in future years, if your employer offers them - provided you're not already saving the maximum £500 per month).
What happens at the end of the sharesave scheme?
In more normal times, you'd get a tax-free bonus at the end of the scheme (or interest added to your savings in your sharesave account if you had to leave the scheme early). However, HM Revenue & Customs (HMRC) sets both the tax-free bonus rate and the early-closure interest rate and both are currently zero (HMRC can change these rates, but it's the rate that applies at the start of your sharesave scheme that counts).
So, while you will only have the exact amount you've saved in to the sharesave scheme, you can choose how you want to use that money. The email you get from the sharesave scheme administrator will usually give you several choices around taking the money, which we run through below
Whether to buy (or keep) the shares is a personal decision. Be guided by your attitude to risk, how much of your total wealth would be tied up in the shares, as well as the general market outlook for your company.
Here are the main options you'll be able to choose from:
Choice 1: take the cash and don't buy any shares
This is more likely to be your chosen course if your company's share price has dropped below the option price you were given at the start.
Here, you'll get back every penny you saved, so it's effectively risk-free. You could then move the cash to a Top Savings Account.
However, if you'd saved elsewhere, you could have been earning interest during this time, so it's not without any cost.
Choice 2: buy and sell the shares in the same transaction
This is more likely to be your choice if your company's share price is higher than the option price you were given at the start and you want to cash in on your profit immediately, or you think there could be a rocky road ahead for your company and its share price is likely to fall from its level at the end of the scheme.
Generally, the buying and selling is done in one transaction and your provider should tell you how much you'll get at the end (though this might be an estimate if the market's not open when you're making the decision). There may also be a small fee to pay to the scheme administrator, or the stockbroker it uses, for buying and selling the shares for you.
Do note that if your company's share price has risen sharply, and you stand to make a profit of more than £12,300 when you sell the shares, you could be liable to pay capital gains tax. See our tax FAQ for more info.
Choice 3: buy the shares and keep them
If you buy the shares, you can keep them for as long as you like. You may choose to do this if you think your company's share price is going to go up and you could sell the shares later at a higher price.
This approach isn't risk free though...
- Your shares could drop in value, potentially even to zero. This is the age-old warning when you invest. Only ever invest what you can afford to lose. While it's unlikely big, public companies will go bust, it does happen. By all means assume it's unlikely to happen to your company, but don't ever assume it CAN'T happen to your company.
- Too much of your wealth is tied up in your company's shares. It's possible to save up to £500 per month in to sharesave schemes. Do this over a three-year period and you'll have £18,000 saved, and may have bought shares worth a lot more than that. If the shares you've bought represent a large portion of your total wealth then if the worst were to happen - your company goes bust and your shares are worthless - you'd lose a large portion of that wealth.
It's usually better to have lots of different investments, then if one is doing poorly, you hope that other investments are doing well to compensate for it - this is known as "diversifying your risk".
- You may have to pay (more) tax when you do sell. This is only likely if your shares have done really well and continue to do so after you buy them, but it's worth being aware of. See our tax FAQ for more info.
If you want to keep the shares, it's likely you can do that in an account with your company's sharesave scheme provider. If you can't, or you want to move the shares to an existing investment account, or a stocks & shares ISA, ask the scheme provider about how to do this.
Choice 4: buy the shares and sell some of them
Just because you've bought the shares doesn't mean you have to sell them all. You can sell some, and keep some for later. You might want to do this if you have an immediate need for some cash, but you also think that your employers shares will (continue to) rise in value in the future.
Do be aware of the risks we cover in choice 3 above, which will also apply to the shares you've chosen to keep.
Choice 5: buy some shares and leave some savings as cash
You have six months to make your decision(s) about whether you want to buy shares at the option price.
You can choose to buy some shares immediately, and leave the rest of your sharesave savings as cash. You may want to do this if you think your company's share price will rise, but want to hedge your bets a little by buying some shares now.
And if your company's share price falls, you may choose to take the remaining savings as cash - especially if the share price falls below the option price.
However, some companies will try to limit the administration involved for employees buying shares at the end of the scheme, and may only allow the purchase of shares on certain days during this six month period. If you're planning to wait, or to do more than one share transaction in that time, check with your company or scheme administrator if this applies to you.
Choice 6: do nothing (for now)
As we say above, you have six months to make a decision about whether you want to buy shares at the option price. So, you could do nothing immediately after the scheme ends and wait and see what happens with your company's share price during that time.
If it rises, you will be getting even more of a bargain buying the shares. But if the share price falls during that time, you need to be okay with the fact that if you do decide to buy the shares, you'll make less of a profit - assuming you sell them - than you would have done having acted promptly at the end of the sharesave scheme. Sadly, this is just the nature of investing.
Again, do check whether you're limited to buying the shares on certain days in the six month period, or whether your employer and sharesave administrator allow you to buy whenever you want to in that time.
Sharesave scheme FAQs
Yes. While you're saving in to the scheme, your cash will go in to a bank account or building society account, and will have the standard £85,000 protection per person per financial institution that normal savings enjoy.
So, provided your sharesave scheme balances combined don't add up to more than £85,000, and they're the only savings you have with that building society, bank (or banking group), they will be safe, protected by the Financial Services Compensation Scheme.
However, if you choose to buy shares at the end of the scheme and plan to hold on to them, the protection is different. It then becomes a 'risk-based investment', NOT savings and the FSCS protection is different...
Investor protection is about providers going bust, not you losing money
The FSCS investment protection applies if you lose money due to the product provider of the investment going bust – for example, if you've bought shares and the company you hold those shares in (whether it's a general investment account or a stocks & shares ISA) goes bust.
Yet in many cases if you're buying shares or funds through a company – eg, some stockbrokers just sell you shares – the fact the stockbroker went bust wouldn't actually matter. You'd still own the shares, so there'd be no compensation.
But, if you've got shares in your company through a sharesave scheme, and then your company goes kaput, then generally there's no safety net to fall back on and you'd lose all your money – that's the nature of investing.
If 'too many' people apply to join a particular year's scheme or the amount they've opted to save is more than your company had planned, it may do what's known as a 'scaling down'. This can happen because companies tend to set aside a limited number of shares that can be bought at the option price at the end of the scheme.
If this happens, the amount you can save each month (and ultimately the number of shares you can buy) will be 'scaled down' - your company will tell you about the new amount you can save.
If your circumstances change you can suspend payments for up to 12 months during the scheme (though you'll still need to make the full three or five years-worth of payments for the scheme to end and for you to have the option to buy shares). It's best to do this if you think you'll get back in to a position to resume payments in a few months' time.
However, if you think the change in your finances is likely to be permanent, you can choose to stop paying in to the scheme at any time and take out any money already saved.
In general, you need to contribute to your sharesave account directly through your employer's payroll.
But, if you're on parental leave, a sabbatical, or temporarily seconded to another company, you can arrange to pay contributions by standing order.
If you need to do this, contact the bank or building society which runs your sharesave scheme to get the standing order details you need.
In general, you won't be entitled to buy the shares as you've left the company. However, you will be able to get every penny of the cash that you've saved in to the scheme back.
There's one exception to this - if you've been saving in to a scheme for more than three years, you can buy shares within six months of leaving. This is provided you weren't sacked for misconduct.
Slightly different rules apply if you've left the company for one of the following reasons:
- Injury or sickness
- Your company's taken over or merged with another
In these cases, you'll usually be able to buy a reduced number of shares at the option price within six months of leaving. You'll also be able to add up to six months' contributions to increase the amount of money available for you to buy shares.
If either of these apply to you, contact your old company or the sharesave administrator (the bank or building society that runs your sharesave scheme) for full information on your options.
It's not a nice thought, but what happens will depend on whether you die during the scheme, or after it's ended.
If you die during the scheme, your 'personal representative' (usually the executor of your will, or your next of kin) will be able to buy shares at the option price within 12 months of your death, if they choose to. Otherwise, they'll be able to take the amount you've saved into the scheme so far as cash and add it to the value of your estate.
If you die after the scheme has ended, your personal representative will have 12 months from the date of your death to buy the shares at the option price, if they choose to. Again, there's no obligation and they can take the cash.
Note that sharesave cash or shares could be subject to inheritance tax.
While there's no income tax or national insurance charged if you buy shares (even if they are worth more than the price you pay for them), you could pay a couple of other taxes on your shares. Whether you need to pay these depends on whether you sell the shares or keep them in the hope they'll enjoy (further) investment growth. The two taxes you could face are:
- Capital gains tax (CGT). If your company's share price has done exceptionally well, and you saved a lot into the scheme, you may face capital gains tax if you choose to sell the shares.
CGT is a tax you have to pay on the gain you make when selling things such as shares, a second home (you usually don't pay capital gains on selling your main home) and jewellery. This example shows how it could work for a sharesave gain...
Sophie Shareholder bought £15,000-worth of shares at her company's £2 option price. Yet, the company has done very well since the sharesave scheme started three years ago, and the market price of the shares is now £4. Sophie sells her shares for £30,000, and so makes a £15,000 profit (this £15,000 is her 'capital gain').
Yet, in the example above, Sophie doesn't actually need to pay tax on the whole £15,000 profit she's made. It's important to understand that she (and all of us) have a capital gains allowance of £12,300 before we have to pay tax. So, in the example above, only £2,700 of the gain Sophie made would be taxable if she sold all of the shares (assuming she'd not made other capital gains in the same tax year selling other shares or property).
If you do need to pay capital gains tax on sharesave gains, basic-rate taxpayers will pay 10%, and higher- and additional-rate taxpayers will pay 20%.
- Dividend tax. You may pay this if you hold on to the shares and your company chooses to pay a dividend to shareholders that year. A dividend is essentially a share of the profit that company has made that year.
And while each person has a £2,000 annual dividend allowance, if dividends paid out from your sharesave shares, combined with any other dividends you receive from other shares, take you above that limit, then you'll need to pay tax at 7.5% if you're a basic-rate taxpayer, or 32.5% if higher rate and 38.1% if additional rate.
There are a few (legal) ways you can avoid these taxes...
Even if you are affected by these taxes, there are a few things you can do that mean you won't have to pay them:
- Put your sharesave shares in a stocks & shares ISA. If you have some or all of your £20,000 annual ISA allowance left when your sharesave scheme matures, then you can choose to put your newly acquired shares in to a stocks & shares ISA (assuming your ISA provider allows it - always check).
Provided you do this within 90 days of buying the shares, you'll no longer have to pay capital gains tax (if you choose to sell the shares) or dividend tax (if you choose to keep them).
It's best to check with your ISA provider how to do the transfer if you plan to do this.
- Put the shares in to your pension. You're also able to move shares in to a self-invested personal pension (SIPP) to avoid any potential taxes, but here you'll need to do so directly from the scheme immediately after you buy them. If not and you move them later, you could end up paying some capital gains tax if they go up in value between the date you buy them and the date you transfer them.
- Sell your shares across two (or more) tax years. As we said above, every UK taxpayer gets a £12,300 capital gains allowance each tax year (which runs from 6 April to 5 April the year after).
In the example above, you could choose to sell £24,600 of the shares in one tax year (fully using your CGT allowance by realising £12,300 profit) and the remaining £5,400 in the next tax year (realising a £2,700 profit if the share price stayed the same) and all sales will be covered by your allowances - assuming you don't sell other assets subject to CGT in the same tax year(s).
Of course, as you'll be holding on to some of the shares for a longer period, they may go down (or up) in value during that time period, which would affect the amount you could sell them for.
- Transfer some of the shares to your spouse or civil partner. You can make a 'gift' of some of your shares to your spouse or civil partner before you sell them. In this way, you can combine your CGT allowances and realise a profit of £12,300 each (£24,600 in total) before you have to pay tax. Additional shares could be sold in the following tax year (or you could choose to pay the capital gains tax due)
Similarly if you keep the shares, your partner also has a £2,000 annual dividend allowance, so if the shares do pay dividends, this could be another way to cut that tax bill.
- Capital gains tax (CGT). If your company's share price has done exceptionally well, and you saved a lot into the scheme, you may face capital gains tax if you choose to sell the shares.
Yes. Just because you've entered in to a scheme doesn't mean you need to complete it - your money's not locked away.
So, just as if you needed your cash for an emergency, or because your circumstances changed, you can decide to stop paying in to one sharesave scheme and take all the money out, and devote the cash to the next year's scheme. The only limit is that you can't contribute more than £500/mth across all the sharesave schemes you're enrolled in at the same time.
However, just because the option price of the second scheme is lower doesn't automatically mean that scheme is going to be a better deal.
None of us know the future - and it may be that your company's share value peaks around the time the first scheme ends, and is much lower when the second year's scheme ends. So, even though the option price of the second scheme was lower, there are scenarios where the first scheme could make you more money.
In general, yes - just head to the sharesave administrators platform (or your own investment account or stocks & shares ISA if you've moved the shares) and hit sell.
The only time you might not be able to buy and sell at will is if you're on what's known as an 'insider list' at your company. You'll likely know if you are on one, but in some cases, this limits your ability to sell shares in your own company at certain times (though usually this happens at senior levels where you also get shares as part of your pay).
Generally this is done because you might have information as part of your job which can affect your company's share price - for example, recent bad sales results which would send the share price down, or info about a new product launch which will send it soaring. If so, your company may limit the amount you can trade, or when you can trade. If you're not sure whether this applies to you, check with your company's HR, investor or legal department.
In general, we'd always suggest first-time buyers look at Lifetime ISAs as a first step. These ISAs let you pay in up to £4,000 each year, then give you a 25% bonus from the state on whatever you've managed to save, up to a max £1,000 per year.
If you've extra to save each month then you could consider using a sharesave scheme. However, there are pros and cons:
If your company's shares do well, then sharesave is likely to beat any normal savings account.
You save directly from your paypacket so there's no temptation to spend the cash rather than save it as it's never in your pocket.
If you just end up taking the cash, and there's no bonus paid (HMRC has set the current bonus levels to zero, though this could change in future), then you would have been better off saving in to a normal savings account.
To have the chance to get the most out of the scheme, you'll need to save for the full three or five-year term (though you can take your savings out as cash sooner if you find a place you want to buy before that)
If you've been offered shares as a bonus or as part of your usual pay, then these are offered under a different scheme - usually a conditional share award plan or enterprise management incentive (EMI) plan. In general, conditional plans rely on you hitting certain goals or targets to get the bonus and EMI plans are only offered by start-ups or smaller companies. If you're not sure about what you've been offered, ask your employer's HR or payroll department.
Sharesave plans are different in that they have no link to your performance in the job. Each employee can access sharesave schemes under the same terms, whether they're entry level, a middle manager or even the CEO.
Of course, while taking part in the sharesave scheme isn't dependent on whether you do a good (or a bad) job, but the better you and your colleagues do, the more likely the share price is to rise and make you a profit on the sharesave scheme.
You may also have been offered a share incentive plan (SIP) as an employee benefit. These plans let you buy shares in your company on a monthly basis up to a certain limit each year. The advantage of these schemes is that you buy shares from your pre-tax salary, so you save on tax and national insurance.
However, unlike sharesave plans, you buy the shares each month rather than at the end of the scheme, and you pay the market rate for the shares at that point - there's no option price or discount. There are also tax advantages to SIPs in that you don't pay capital gains tax on the increase in value. And if you hold the shares for five or more years without selling, you won't pay income tax or national insurance either.
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