There is a great way to save regularly and gain from the effort you put into your work. Not only does it bring the discipline of putting aside some money each month but the rewards can be tax-free.
Save As You Earn (known as SAYE) is the most popular share plan for staff. It enables anyone employed by a firm to purchase shares at a discounted rate from their income.
One pub waitress for Whitbread pocketed 62,700 after saving the maximum 250 a month for five years, which shows how the benefit of a rising share price can help an employee.
The plan allows a fixed sum to be saved each month, usually between 5-250. The maximum sum will be decided by the company who can place a lower limit.
The date when an employee qualifies to join a firm's SAYE plan depends upon that company. Tesco, for instance, accepts staff who have been employed for at least 12 months.
They have one of the largest take-ups of any firm for their SAYE.
The 55,000 members of Tesco staff who joined SAYE plans in either 2004 or 2006 received a share of a 143m payout when both schemes matured this year.
The deductions are taken directly from salary by payroll and paid into a special savings account at a bank or building society which holds it until the end of the plan, which is typically five years. At that stage, Revenue & Customs add a tax-free bonus.
The employee then has two choices:
n buy shares at a substantially discounted price or
n take the cash
The decision whether to take the money or opt to buy the shares does not have to be made for six months from the maturity date. The purchase price per share is set at the start of the plan.
Many, like Sainsbury's, offer the maximum 20 per cent discount which is based on the market price on a set date when the invitation to join the plan opens. One-fifth discount to the stock market price is set in 75 per cent of cases, according to Ifs ProShare, the organisation which promotes staff share ownership.
An employee gains from the immediate discount on the share price and benefits from any increase in its market value during the life of the investment. It is a 'win, win' situation for if the share price falls, the cash alternative can be taken.
The only risk would be if the firm goes into bankruptcy. Sadly employees at Independent Insurance, Marconi and Railtrack lost out this way, as did Northern Rock when the firm was nationalised two years ago.
If SAYE is your only investment, then the risk may be too great as – despite the generous tax incentives – combining your salary, pension and savings into one pot with no other reserve would not create a balanced portfolio.
For everyone else, the opportunity should be seized. The thinking behind SAYE is clear: by aligning the financial interests of all staff – directors, managers and employees – a more successful firm can be created by pulling together. SAYE is therefore a strong money carrot to achieve success and retain good staff.
The length of time for each plan is three, five or seven years although five-year investors can continue to leave their account open for a further two years if the company agrees.
The tax-free bonus earned varies depending on the period. On a new five-year scheme, it is 0.9 times the monthly contribution, which means an effective annual interest rate of 0.59 per cent (down from 1.16 per cent pre-September). With a seven-year plan, the bonus is 3.2 times the monthly premium, creating an EAR of 1.15 per cent, down from 1.74 per cent.
Such bonuses are fixed from the inception of each plan and depend upon wholesale money market rates, which determine the cost of borrowing for large institutions. They are not generous and better regular savings rates can be obtained elsewhere.
Skipton Building Society offers five per cent for a committed term whilst Saffron Building Society pays four per cent on an instant basis for its 12 months account. Both require at least 10 monthly to be subscribed.
If shares are taken instead of cash, the holder can retain them or sell them.
If the price at the end of the plan (or within six months) is below the then current level in the stock market, there is clearly no point in acquiring them at a loss.
No income tax liability arises when the option is granted but if the shares are sold, Capital Gains Tax liability is calculated based on the price of the shares, not on the profit.
One way to avoid CGT would be to place the shares in an Individual Savings Account (ISA) where the current annual allowance is 10,200.
However, a transfer to an ISA must be completed within 90 days of acquiring the shares.
Not surprisingly, SAYE has attracted 1.36m subscribers. Only one plan can be started each year but several can be running at the same time provided that the total monthly premium is not more than 250.
One key point which is little known is that any money held in the special account of the bank or building society counts towards the compensation limit offered by the Financial Services Compensation Scheme. If you have other savings with the same organisation, you may not be fully protected.
There are some alternatives to SAYE. 'Buy As You Earn' is another tax-efficient way to invest and benefit from the success that an employee helps a company to achieve.
It is a share purchase scheme with the employee buying shares at the stock market price from their gross pay each period before both income tax and national insurance contributions are deducted.
This means that the value of the shares bought is more than the net pay the employee gives up to purchase them.
Like SAYE, such a scheme increases staff loyalty to the company.