Workplace investment schemes

A few years ago, workplace savings just meant your pension – but now some companies are offering other tax efficient options, to save or invest.

Types of workplace savings scheme

There are a number of workplace savings schemes, but the three main types are:

  • Save As You Earn (SAYE)
  • Share Incentive Plans (SIPs)
  • Workplace ISAs

Each works slightly differently, but they have the same purpose – they encourage saving and they give you tax breaks. Note that these schemes do not replace the need to save towards retirement, neither are they as tax efficient. Read on to find out more.

Save As You Earn (SAYE)

Save As You Earn (SAYE) is a monthly saving scheme that gives you two things: a tax-free bonus and an option to buy shares in your company at the end of the scheme.

  • The scheme is set up by your employer, and must be available to all employees who have been with the company for a certain amount of time.
  • You can save up to £500 each month while the scheme lasts – it usually runs for three or five years. At the end of the scheme, a tax-free bonus is added to your savings.
  • You can either take the money and bonus as cash or use it to buy shares in the company. The share price is set at the beginning of the scheme – so, if your company does particularly well during the lifetime of the scheme, you’ll end up buying them very cheaply.

Tax breaks on a SAYE can be very worthwhile.

  • You don’t pay any tax on your bonus, as long as you keep making payments until the end of the SAYE scheme.
  • If you choose to buy shares, you don’t pay any Income Tax or National Insurance contributions on the amount of profit you make – that is, the difference between what you pay for them, set at the beginning of the scheme, and what they’re actually worth when you buy them.
  • When you sell the shares, you may have to pay Capital Gains Tax if your capital gain is over the annual exempt amount for the tax year – but not if you put them into an ISA or a pension within three months of maturity subject to normal allowance limits.

Share Incentive Plans (SIPs)

Share incentive plans (SIPs) are a tax efficient way to buy or receive shares in the company you work for because you don’t pay tax or national insurance contributions on the shares you buy.

  • The scheme is set up by your employer, and must be available to all employees who have been with the company for a certain amount of time.

There are four different ways you may receive shares:

  • Free from your employer. They can give you up to £3,600 worth of shares in any tax year.
  • Buy them yourself. You can buy shares straight from your pay (up to £1,800 worth in any tax year or 10% of your annual income, whichever is lower). These are called Partnership Shares.
  • Share-matching from your employer. For each share you buy yourself, your employer can give you up to two free shares.
  • If you receive dividends from your shares, you can use them to buy more shares in the plan.

Tax breaks from SIPs depend on when you take your shares out of the plan.

  • If you keep your SIP shares in the plan for five years, you won’t have to pay Income Tax or National Insurance contributions on them when you do take them out. Usually, they’d be taxed as part of your income.
  • If you keep them in the SIP until you sell them you won’t pay any Capital Gains Tax on them. If you take them out and then sell them later, you might have to pay it – but only on the amount they increase in value in the meantime.
  • If you don’t leave your shares in the plan for the full five years, you may pay Income Tax and National Insurance contributions - the amount depends on when you take them out and the reason for withdrawing them.

Workplace ISAs

Workplace ISAs started out as an easy way to contribute to a stocks and shares ISA directly from your salary, giving another tax-free savings option on top of company pensions. Now, though, they’re a little bit more – you get a lot of perks and discounted fees when you get your ISA through your employer.

  • You make monthly payments (up to a set limit) directly from your pay (after income tax and National Insurance contributions have been deducted) into the ISA.
  • It’s usually a stocks and shares ISA, where you can choose from a set of funds to invest in. They may be the same as the funds in your company pension scheme.
  • There are lots of savings compared with getting an ordinary stocks and shares ISA – reduced or no initial charges, reduced management fees and reduced fund-switching fees. Put simply, your employer gets a bulk discount, and you get the benefit.
  • You have fewer options for changing your mind – unlike ISAs you buy directly, you can’t switch to a different ISA provider if your ISA is performing badly, though you can still switch funds.
  • If you leave your company you’ll stop making automatic payments from your pay. You can keep paying into your ISA if you like, by topping up with a minimum payment.
  • Like all investments, with Stocks and shares ISAs the value of your investment can go down as well as up. You may get back less than you invested.

Most people’s Stocks and shares ISAs are invested in funds. If your employer offers a workplace ISA you can compare the funds it invests in with the other options on the market using the Investment Association website.

Tax advantages of workplace ISAs are the same as those of ordinary ISAs.

  • You don’t pay Income Tax on any income or dividends from the ISA.
  • If you make a profit selling shares from your stocks and shares ISA, you don’t need to pay Capital Gains Tax – but if you make a loss it doesn’t reduce your Capital Gains Tax either.

Annual ISA limits

Bear in mind that you can only invest in one Stocks and shares ISA each tax year. If you have a workplace ISA then you can’t open a ‘regular’ stocks and shares ISA as well, even if you’re not paying the maximum allowance into your workplace scheme. Find out more about the limits in our guide on Stocks and shares ISAs.

Do you have all your eggs in one basket?

If your employment, pension and investments all depend on the performance of one company you may want to consider ways of diversifying over time to spread your risk

Do you need expert help?

If your finances are complicated it might pay to get professional advice on workplace schemes and other investment options. Read our guide to find out if financial advice is right for you.