How employees can reduce investment risk and avoid unnecessary tax
Many Save As You Earn (SAYE) share plans are due to mature in the coming months and years, with some employees likely to have doubled, or even tripled the amount of money they saved due to favourable market conditions since the pandemic.
However, without expert guidance, many may not understand their options once their share plan matures and could be at risk of paying unnecessary tax.
Jonathan Watts-Lay, Director, WEALTH at work, comments;
“Save As You Earn (SAYE) plans can be an attractive way for employees to invest in their future. These plans run for 3 or 5 year terms, and employees can decide how much to save each month (up to £500 a month). At the end of the plan’s term, if the share price has fallen, employees can receive all their savings back. If the share price is higher than the fixed price agreed at the start of the plan, employees can use their savings to buy shares and realise any returns.”
He adds, “We are now at a start of a two-year window where a lot of SAYE plans are coming up to maturity and many will have big gains. This is because in 2020 when markets fell, share plans that launched generally had a low share price at inception. On top of this low starting share price, many companies also offered a discount, giving employees a particularly low fixed price at the start of the plan. As a result, a lot of people will be in a position to double or even triple the money they saved.
However, whilst a financial windfall may seem like a dream to most, participants need to be well informed to make the right decisions as to whether they should sell shares or continue to hold on to them. An understanding of the value that dividends may provide in the future and the importance of not putting all their eggs in one basket and diversifying their investment, are all things employees should consider.”
Watts-Lay comments; “For those who are thinking about selling their shares, it’s important to understand what they can do to reduce, or even eliminate a potential capital gains tax (CGT) charge.”
He explains; “CGT only has to be paid on overall gains that exceed the CGT allowance, which is £6,000 for the current tax year. Where gains from a SAYE plan exceed the available allowance, CGT is charged at 10% if the gain falls within the basic rate tax band, or 20% for anyone who pays tax at a higher rate. There are, however, a number of ways of maximising tax allowances to help reduce or eliminate a CGT charge.”
To help employees understand what they can do to mitigate their tax liability when their shares mature, WEALTH at work has put together some tips.