How to 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, a leading financial wellbeing and retirement specialist – helping those in the workplace to improve their financial future, 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 that should be considered.”
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 people understand what they can do to mitigate their tax liability when their shares mature, WEALTH at work has put together some tips.
WEALTH at work’s tips to reduce your CGT charge
Transfer to an ISA within 90 days
Shares can be transferred directly into an ISA up to the value of £20,000 each tax year. If they are transferred within 90 days of the date you exercise your options to buy shares from a SAYE plan, the transfer is not a chargeable event for CGT purposes. You can then sell your shares immediately free of CGT, or keep them in the ISA which is useful if you are considering holding shares, sheltering future returns from tax, or diversifying your shareholding into other stocks and shares.
Spread the sale of shares over two tax years
The CGT allowance is available to you each tax year which runs until 6 April. Whilst the limit is £6,000 this tax year, it is reducing to £3,000 from 6 April 2024. If you realise a gain of £6,000 this tax year, you could hold on to the remaining shares and sell a further amount to make use of your £3,000 CGT allowance in the 2024/25 tax year. Individuals however must be aware that if the value of the shares fell during this time, this could reduce their overall return.
Transfer to your spouse or civil partner
If you are at risk of breaching the capital gain tax allowance limit, you could transfer some shares to your spouse or civil partner to benefit from their unused CGT allowance. You must be married or in a civil partnership for this option to apply.
Bring these strategies together
Those with larger gains may benefit from combining the strategies above. For example, an individual who saved £18,000 into a share plan with an option price of £1 would be able to buy 18,000 shares at maturity. If we assume the share price at maturity has risen to £2.69, their shares could be worth £48,420 at maturity, meaning they have a gain of £30,420. Selling all these shares at once and using only their own £6,000 CGT allowance could lead to a tax charge of £4,884, or half this amount if they are a basic rate tax payer. Combining the above tax planning strategies together could potentially reduce their tax charge to zero.*
Jonathan Watts-Lay, Director, WEALTH at work, comments; “SAYE plans are used by many companies to motivate and reward their hard-working employees. It is a low-risk way to save for the future, with the possibility of a very good return on your investment. After all these years of saving, you really don’t want to be paying unnecessary tax. We have worked for many organisations with SAYE plans to provide financial education, guidance and regulated financial advice for their staff to ensure they understand the benefits of taking part and what steps they need to take when their plan matures.”