Taxman has something to share with you

Published on Friday 17 October 2008 22:42

THE taxman loves taking a bite of our hard-earned money, but he can dish it out too.

There are numerous tax breaks many people are unaware of, let alone take advantage of, a good example being work-based share schemes that offer a tax- efficient way of saving.

It is estimated that two million UK workers are members of some form of share save scheme, a number dictated largely by the extent to which the schemes are offered.

The indications are that the economic downturn has not stopped employees taking advantage of the benefits on offer.

"The trend has been settled, but it's positive so far," said Sally Russell, consultant at employee share ownership organisation Ifs ProShare. "It will be interesting to see in a year how the current climate has affected take-up."

The flipside to the current market turbulence is that starting a scheme now, when prices are low, will probably boost the returns you get in the long run.

The best-known scheme is Sharesave, also known as save-as-you-earn (SAYE), introduced in 1991 and allowing employees to save between 5 and 250 a month for either three, five or seven years. At the end of the savings period, the pot of money has a tax-free bonus added on and you have the option of using it to buy shares in the company, typically at a discount of up to 20 per cent of the price at the start of the scheme.

If the share price is lower at the end of the scheme, you can opt to keep the savings and the tax-free bonus.

If you exercise the share option, no income tax is payable but there can be a capital gains tax (CGT) charge if the annual CGT exemption, 9,600, is breached. When the plan matures, the shares can be transferred into an Isa, ensuring any dividends and gains are free of future tax.

Despite these benefits, average take-up of sharesave schemes is about 40 per cent of employees, said Susan Cruden, senior employment tax manager at Grant Thornton Scotland. "It's a good way of saving; it's tax efficient and you can't lose the money you put in unless your firm goes bust, so it's hard to say why more people don't use it."

In 2001 Share Incentive Schemes (also referred to as Share Incentive Plans) were launched and are now offered by nearly 800 companies, including many smaller firms.

A smaller work-based share plan is the Enterprise Management Incentive Scheme.

But while the tax breaks from most work-based share incentive schemes are generous, they're not always the best option, said Alison Paul, trust and tax partner with Turcan Connell in Edinburgh. She advises taking independent financial advice when considering a scheme.

"Think about your cash flow, as to some extent you're using your cash to buy shares. Also look at your other tax liabilities. The tax breaks are generous, but be aware of any issues that could be raised when you exercise your options."

Other considerations include how long you are likely to stay with your company; that company's financial strength and how the ownership of shares fits in with your other investments.