Cash flows as the shop floor meets the stock market

Less than a third of staff join them, but share-save schemes are too good to ignore, writes Sam Dunn

As perks of the job go, spending your salary on shares in the firm you work for is nowhere near as attractive as a new company car, gym membership or private medical insurance.

As perks of the job go, spending your salary on shares in the firm you work for is nowhere near as attractive as a new company car, gym membership or private medical insurance.

UK companies operate a total of 5,900 share-save schemes. But on average, less than a third of the staff eligible to take advantage of them bother to do so, according to Proshare, an organisation that encourages share ownership.

"Depending on economic conditions, the popularity of share-save schemes does wax and wane," says Paul Falvey, a partner at accountant Grant Thornton.

"They are much more popular than 10 years ago but there's always the issue for employers that, if you tell staff to invest and then shares fall, you're going to have a very unhappy workforce on your hands."

Part of the problem is that - after tax, national insurance and probably a monthly pension contribution - the last thing most of us need is another drain on our finances. Yet share-save schemes can offer tax breaks, give you a chance to buy into the stock market cheaply, and are one of the few investments to have support from most independent financial advisers (IFAs).

The financial rewards can be great. More than 150,000 shop-floor staff in the Tesco supermarket chain last week benefited from bonuses. Staff who had been saving £25 a month for five years into its two share schemes received an average of £4,000.

Employees of a rival supermarket were celebrating too. Even though J Sainsbury's profits have plummeted, some 135,000 staff at well-run stores within the group received a bonus of £200 each.

The Royal Mail, which has just revealed record annual profits of £537m, delivered a bonus to all its postal staff last week too - in this case, £1,000 each to around 180,000 workers.

The way in which each of these three employers hands over hard-earned rewards to its staff differs according to whether individuals have signed up for a share or incentive scheme. If they have not, the money will be included in their pay packet as a one-off sum.

Nationally, there are three main share-save schemes available. The most popular is save-as-you-earn (SAYE), but only larger companies can afford to offer this to all their employees. Currently, there are nearly 1,000 SAYE schemes in operation, mainly run by firms listed on the FTSE All Share index.

Staff must first decide how long they want to save money for - usually three or five years - and how much is to be deducted from their net salary each month. This can range from £5 to a maximum of £250.

Most participant companies run one scheme a year. At the start date, the share price is duly noted for all staff taking part.

Three years later, using the lump sum they have built up, staff then have the "option" to buy shares in their company at the price they were back at the outset. Crucially, shares are usually available at a discount of up to 20 per cent.

Suppose, for example, you started paying into a savings plan three years ago when the share price was £1; now it is hovering at £1.80.

With a discount of 20 per cent on each share, you can buy shares worth £1.80 at the knock-down price of 80p. If you wish, you can immediately sell them on at a profit. If you think they will rise further, you can hold on to them.

Of course, you will only be getting a discount on the original price if the company's shares have risen. If your employer's fortunes have waned, your option to buy shares at a higher price than on the open market will be distinctly unattractive.

But this is where SAYE is a winner, say IFAs: if the share price has fallen, you can simply walk away with the money instead, tax-free, with a cash bonus paid on top.

"To a certain degree, SAYE is a no-brainer," says Ben Yearsley of IFA Hargreaves Lansdown.

"It's a great way to get into a monthly savings habit. You can buy shares at a discount and you have the choice of taking the cash in a tax-free sum."

Sell the shares and you'll have to pay capital gains tax (CGT), but unless you've made a profit of more than £8,500, your annual allowance will cover it.

If you leave your company through redundancy or illness, you will have six months in which to exercise the share option. But if you leave to join another firm, you either have to keep saving until the end of the term of the plan, or take the cash straight away.

The main alternative to SAYE is the share incentive plan (SIP). In this case, your firm gives you a bundle of its own shares for free (up to £3,000 worth a year) without any income tax to pay. Alternatively, you can purchase up to £1,500 a year of company shares, and your employer will at least match this.

The risk here is that you are buying shares rather than share options, says Mr Yearsley. "All your eggs are in one basket."

However, buying shares on a regular basis can give you "pound cost averaging", where you pay less for shares if they drop in price. "As long as you have other investments, this is fine," adds Mr Yearsley.

A third popular scheme, found in smaller privately owned companies, is the Enterprise Management Incentive. This kind of private equity scheme is offered as an incentive to staff who would otherwise head for bigger companies and better salaries. Hold on to the shares for four years and you benefit from CGT relief.

Details of any share plan should be provided when you join a new company. Even so, it's easy to overlook benefits like this. Ask your personnel department for information.