Client questions
There are many financial issues facing us all in the UK today; an ageing population, pressure to consume, insufficient saving, incomprehensible financial products and services, whilst to top it all there are very few places to turn for truly impartial advice.
This section of our website aims to answer some of the questions we are commonly asked by clients. We hope you find what you need, but if not why not have a look elsewhere on our site or e-mail us your question using our enquiry form.
Q - Should I join my employer's share scheme?
These were originally known as the All Employee Share Ownership Plans and allow a company to offer its employees tax favoured acquisition of shares. For example, employees can purchase shares of the employer from their gross salary prior to deduction of income tax and National Insurance, via payroll deduction. This is a big advantage.
Shares in a SIP can be of different types:
- free shares
- purchased shares
- partnership shares
- dividend shares
Free shares allow the company to gift up to £3,000 worth of shares per annum, tax free. Clearly, if your employer is offering you these, they are worth having! After a required holding period, shares are released from a trust and may be sold free of tax or National Insurance. If the shares are released early then income tax is payable by the employee and National Insurance contributions will be due from both the employer and the employee.
Purchased shares are the shares that you, the employee, purchases with the regular amount deducted from your salary. This means that you are buying them out of gross income rather than net income so the real cost to you is reduced. There is a minimum deduction of £10 per month and a maximum of £250 per month.
Partnership shares are awarded to employees in return for their purchasing shares for themselves. These are also known as “matching” shares where the company may match shares purchased based on a formula determined by the company, and subject to two shares from the company for every one purchased by the employee (the 2:1 limit is set by HMRC). HMRC limit the maximum the company can match to a maximum value of £1,500 each year (£125 per month).
Dividend Shares are shares purchased with dividends on existing shares held in the plan. Again there is a holding period in order for the tax and National Insurance benefits to accrue.
All types of share have to be held for a fixed period set out in the plan, in order to benefits from the tax and National Insurance savings, and be free of capital gains tax on their disposal.
All in all, it is well worth joining. As we always explain to clients, holding individual shares is a risky business and as a rule of thumb, you should sell the shares as soon as you have a tax-efficient opportunity to do so. Otherwise, we tend to find that employees acquire more and more shares and become heavily exposed to shares in one company. When that company is also your employer it adds to the risk!
Evolve - September 2009
