How to start investing with an employee share scheme
Share schemes offered at work can be a brilliant way to get into investing. However, they come in different guises — with very different risk profiles — so it’s worth knowing exactly what’s on offer, and whether it suits you.
SAYE — or Sharesave
There are two types of "all-employee" scheme. The most well-known are SAYE schemes — otherwise known as Sharesave. They’ve been around since 1980, so tend to be the first kind people think of.
They start out as savings plans. You can save up to £500 a month for a fixed period of three or five years into a specific savings account. At the end of this time, you might get a tax-free bonus on your savings. At that point, you can buy shares with the proceeds.
The key here is that the price of these shares was fixed when you started saving — and can be up to 20% cheaper than the share price at the time. It means that if the share price has risen above the fixed price, you can buy them and either hold them or sell them for an immediate profit.
So, for example, at the start of the scheme, the shares might be worth £1 each, but your fixed price is 80p. During the next three years the share price rises to £2, so you can buy and sell on the same day and make £1.20 per share.
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Alternatively, if the fixed price is higher than the current share price, you can simply withdraw your savings and any bonus. So if, in the same scenario, the share price has fallen to 50p after three years, you just take your savings back.
For anyone who has been tempted to invest, but is worried about taking a risk, this offers the best of all worlds, because there’s the potential of growth, with the fallback of your money back.
If you’re considering joining an SAYE scheme, it’s vital to consider what you’ll do at the end of the scheme. If you buy and sell the shares for a profit immediately, you’re not taking any investment risk. If you are planning to hang onto the shares, it takes on a completely different risk profile, because you’re holding single company shares in your own employer, which only makes sense if you already have a diverse portfolio.
SIPS
Share Incentive Plans (SIPs) are less well-known than SAYE, because they started in 2000, but they’re offered by more companies. In 2023/24 there were 830 companies running SIPs and 520 running SAYE in the UK.
In many cases, they simply let you buy shares in the company you work for tax-efficiently. Each year, you can buy up to £1,800 worth of what’s known as partnership shares. You buy them out of your pay before tax and national insurance, and they go into a trust.
This benefit isn’t to be sniffed at, especially for higher and additional-rate taxpayers, who stand to make a substantial saving. As long as the shares stay in the trust for at least five years, you keep these tax perks. However, over that time, the price will rise and fall just like shares you buy any other way.
There are other, more generous, versions of the scheme that your employer can offer. They can give you free shares — worth anything up to £3,600. They can also offer matching shares of anything up to buy-one-get-two-free.
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Finally, they might also allow you to spend any dividends on these shares on buying more company shares within the scheme. However, partnership shares remain the most common version.
The SIP is less of a no-brainer, because there’s a chance that during the five-year period, the share price drops to below what you paid for them — even taking the tax saving into account. You’re effectively taking the risk of investing in single company shares with your employer from day one, so you need to consider if it makes sense with the rest of your portfolio. You also have to hold the shares — and stay with your employer — for five years in order to get the tax breaks or keep any free shares.
If you opt to join either of these schemes, it’s a good idea to think about tax. Once you’ve held shares in a SIP for five years, they’ll effectively come out of the scheme, and any further growth could be subject to capital gains tax, and dividends to dividend tax.
Sharesave shares, meanwhile, follow all the usual tax rules once you buy them. However, with both, you can transfer the shares into an ISA within 90 days and protect them from tax.
Sarah Coles is a personal finance analyst at Hargreaves Lansdown and co-presents Switch Your Money On podcast.
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