Sharesave versus share incentive plans

If you read nothing else, read this …

• Sharesave and share incentive plans (Sips) offer income tax and NI exemptions, subject to certain terms.
• Sharesave schemes are savings vehicles to which employees can contribute between £5 and £250 a month out of net pay, with which they can buy shares after three, five or seven years. Sip schemes enable employees to buy shares out of gross pay from day one
  of their investment.

 

Case study: BT staff connect with sharesave and Sip

British Telecom Group (BT) runs both a sharesave and a share incentive plan (Sip).

Some 46,000 (60%) of its staff belong to the sharesave scheme, administered by Equiniti, and invest an average of £150 a month, while 21,000 (28%) take part in the Sip, investing an average of just under £100 a month.

This is far below the near-100% participation rate the Sip saw until 2007, when BT stopped offering one performance-related free share per employee. It now offers only partnership shares, having replaced the free shares with free BT Total broadband.

Francis O’Mahony, BT’s head of employee share schemes and share registration, says: “We wanted to promote our BT broadband, which we did by getting employees signed up. The level of free shares as a cost to BT was deemed to be part of that cost-reduction process.”

O’Mahony says BT offers a 10% discount on shares bought through its three-year sharesave scheme and a 20% discount through its five-year scheme.

 

Case study: B&Q aims to build loyalty

B&Q, part of Kingfisher Group, offers both a sharesave and a Sip to help build long-term staff loyalty. The sharesave scheme was first introduced in 1993, and the Sip in April 2011.

Last December, Kingfisher’s three and five-year SAYE schemes matured. Staff in the three-year scheme, which started in 2008, gained an average of £8,000. More than 2,000 Kingfisher staff, mostly B&Q store-based workers, shared a combined windfall of £7.9 million across both schemes.

Since 2010, Capita Share Plan Services has administered the SAYE and Sip schemes.

B&Q communicates its share plans via mailshots, in corporate newsletters and on display posters, as well as by DVD at some locations.

 

Sharesave schemes and share incentive plans offer different advantages to employee investors and to the employers offering them, says Clare Bettelley

Share schemes can be an attractive employee benefit to offer in the absence of pay rises, helping to boost staff motivation. Two popular options are sharesave, also known as save as you earn (SAYE), and share incentive plans (Sips), but which is best for employer and employees?

Sharesave and Sips are both HM Revenue and Customs-approved, but that is almost where their similarities end.

Sharesave has been around since 1980 and is effectively a savings vehicle into which staff can invest between £5 and £250 a month out of net pay for three or five years. There is also a seven-year version, but the maximum saving period remains five years – the cash is simply held in the account for two extra years.

At the end of the term, staff can buy shares in their employer, which can be offered at a discount of up to 20% on the market value, or they can take the savings they have accrued. Schemes are typically provided by one of five recognised sharesave licence holders: Barclays, Capita Share Plan Services, Computershare, Equiniti and Yorkshire Building Society.

By contrast, employees in a Sip become shareholders on day one of their investment, although the shares are held in trust. There are four types of Sip shares: partnership shares, matching shares, free shares and dividend shares.

Staff can invest up to £1,500 a year or 10% of salary, whichever is less, in partnership shares. Employers can grant up to two free matching shares for each share bought, up to £3,000 worth of free shares per employee per tax year.

Dividend shares are any dividends earned on the shares held in trust and can be reinvested into shares.

Tax incentives are a major attraction of sharesave and Sips. Both are exempt from tax and NI if, in the case of Sips, shares are in the trust for five years. Employers can get capital gains tax (CGT) relief on the cost of running either scheme.

The second attraction of both schemes for employers and employees is the ability to create a sense of ownership. For employers, the schemes help to attract and retain staff, while employees feel a sense of belonging as they build up their savings.

John Collison, head of employee share ownership at Ifs ProShare, says: “People view sharesave as part of a portfolio. It demystifies the share-buying process. If you have never owned shares, suddenly you have a little booklet at work saying that for between £5 and £250 a month, you can become a partner in the firm you work for.”

Transfer to an Isa

But each scheme also has downsides. For example, sharesave investors are liable for CGT on the sale of shares, but this can be avoided by moving them into an individual savings account (Isa) or pension fund.

The second downside of sharesave is the current bonus rate of zero for three- and five-year plans, and the interest rate of 0.6% currently being paid on the seven-year term. David Reuben, a solicitor with Postlethwaite, says: “[Employer] clients are a bit less keen on sharesave because if the share price isn’t doing well, employees think it’s three years of contributions and they’ve got nothing out of it.”

Thirdly, sharesave is relatively rigid in structure, with employers unable to set their own savings terms or performance criteria for share eligibility. But it is sharesave’s simplicity that makes it a popular choice for employers.

Ifs Proshare’s Collison says: “It’s flexible, it’s easy, it’s a low enough amount to include everybody, and that’s why staff like it, along with the no-lose situation. They are saving for three years and only then decide whether to buy the shares, if the price has gone up. This is a soft, no-risk introduction to owning shares.”

One downside of Sips is that staff become shareholders as soon as they invest, so are immediately subject to share price volatility.

And for new investors, a Sip is complex, particularly as regards tax. Shares that have not been in a scheme for at least five years are subject to income tax and NI.

Employees removing partnership shares that have been in the Sip for less than three years will be liable for income tax and NI on an amount equal to the market value of the shares when they are removed.

Partnership shares that have been in a scheme for between three and five years of the date of award will be subject to income tax and NI on either the salary used to buy them or the market value of the shares when they are removed from the scheme.

Costs are a major downside of Sips, due to the set-up costs and administration involved in, say, buying shares each month. Collison says set-up costs can range from £5,000 to £25,000.

But Sips offer flexibility in the length of time staff can save and the number of shares they can accrue through free and matching shares from their employer.

William Cohen, a partner at Deloitte, says employers must consider their reasons for wanting to introduce a share scheme. “Why does a company want an all-employee scheme? There is a range of reasons. It can be about hearts and minds, making people feel like shareholders, it can be about boosting morale when everyone is a bit down because there are no pay increases.”

Read more articles from the Workplace Savings Quarterly