Last Updated on 10 January 2025 by Dan Wilderness
Hello everyone! Today’s article isn’t something that will apply to everyone, but there’s a number of big companies (some examples include Tesco, Barclays, Natwest, Next and Asda) that run an annual ShareSave scheme.
Someone I work with was very unfamiliar with ShareSave and was looking for some guidance on such schemes are worthwhile – so I thought I would turn this into an article!
As ever – our normal note that we take care with what we write on this site but it is not official “financial advice” and whatever investments and savings you enter need to be right for your circumstances. We always suggest doing your own further research. If you’re in doubt about anything, it’s worth consulting a regulated and reputable financial advisor who can provide tailored advice built for you.
Unbiased is a resource that can help you match with an advisor who matches your needs.
With a Sharesave scheme, you enter into an agreement to buy company shares over the long term (3 or 5 years).
However, there’s a couple of extra incentives that can make a Sharesave scheme a better option than buying the shares directly:
- The company can give you up to a 20% discount on the present share price. (In practice, most Sharesave schemes I’ve seen do apply the full 20%).
- A Sharesave scheme gives you an option on the shares at the end – what this means is that if the share price has declined more than the 20% discount at the end of your period, you can get the money you’ve put into the scheme instead.
You pay for a Sharesave scheme by paying money directly out of your paycheck each month – which is a great way of getting into a regular savings habit.
They’re usually run annually, and so require you to sign up in a specified period, often towards the end of the year.
In theory, you can put up to £500 a month into a Sharesave scheme, although companies can limit you to a lower amount and often do.
You are also limited to paying in a maximum of £500 per month across all Sharesave schemes you’ve got in operation at any time.
What this means is that if your employer does let you make a full £500 contribution into a scheme, you wouldn’t be able to make additional contributions for the next year’s scheme until your 3 or 5 year term has expired.
You’ll need to save into a Sharesave scheme for 3 or 5 years. There often is the option to pause contributions if you need to (or when various life events like maternity leave occur), but terms very my scheme so you’d have to look at the specifics of your companies particular scheme.
Let’s look at an example of how a Sharesave scheme might work, and what the situations might be if the share price increases or decreases.
- At the time your company offers their Sharesave scheme, their shares trade at 200p a share.
- They offer them though Sharesave at a 20% discount, so your option to buy is actually at 160p a share.
- You take a 5 year savings plan, and at the end of it your company share price is 320p a share.
- In this case you would claim the share option. Congratulations! You can now either hold your shares directly, or if you elect to sell them immediately, your gain is the difference between the 160p and the 320p the shares are now – I.E you’ve doubled your money.
- Same starting point – At the time your company offers their Sharesave scheme, their shares trade at 200p a share.
- They offer them though Sharesave at a 20% discount, so your option to buy is actually at 160p a share.
- You take a 5 year savings plan, however at the end of it the share price has declined to 150p.
- In this case in makes sense not to claim the option. You’ll receive a refund of the 5 years of contributions, effectively getting money back to the equivalent of 160p per share.
The key drawout here is that you do not face the same losses in event of a share drop that you would by owning the shares directly.
At the end of the Sharesave savings period, if you elect to take the share option you now directly own the shares!
You’ve got four core options now:
You can immediately sell the shares at market price and take the money. If the share price has gained over the option price, you may have a taxable gain and have to pay capital gains tax if it goes above your annual allowance (more on UK tax allowances here), but you can minimise this with the option below.
Important note: You must do this within six months of exercising the option to get full relief.
By transferring the shares into a stocks and shares ISA, you’ll remove any ongoing capital gains tax liability (more on UK tax allowances here). You can now either sell the shares without incurring any capital gains tax, or if you elect to hold the shares you won’t get taxed on any further gain or dividends whilst you own them.
Unsure what an ISA is? Check out our guide to why to make use of an ISA.
If you think the share price of your company will continue to increase, you may want to continue to hold the shares (inside or outside of an ISA). You’ll now be subject to any further fluctuation in the share price, but also receive dividends and any other benefits of share ownership.
A mixed approach: Hold some and sell some
You don’t have to commit to doing everything the same way with your shares – a mixed approach where you hold some shares and sell some is entirely possible.
If you sell your shares at the end of the period, any gain made over the option price will be liable for capital gains tax (although the Government gives you an annual capital gains tax allowance before this is owed).
It’s possible to mitigate the capital gains tax aspect by moving your shares into an a Stocks and Shares ISA
If your company gives you the full 20% discount on the share price, this is a very substantial gain already on what others in the market are actively paying and provides a very strong margin against losses.
Any benefit over market price is good, but we think anything beyond a 10% discount is a really strong beenfit.
Taking the scenarios above – the gain you can make if your company does well is unlimited. However, if the share price goes down, you can at least get your money back.
This means Sharesave is likely to work in your favour unless your company goes through a particularly bad period.
Nothing is ever guaranteed with investments, but if you company goes through good years you can see some really good returns – we know some people who during Tesco’s growth years regularly saw their investment double or more though Sharesave.
We always encourage saving for your future here at the Wilderness and a Sharesave scheme is a good low-effort way to do it – straight out of your paycheck so you don’t have to think about it except at the beginning or end of your savings contract.
If you gain with Sharesave and transfer the shares to an ISA, you won’t face any capital gains tax on the difference between the option price and the share price when you sell them, and any ongoing dividends will also be tax free.
Whilst as above the downside of a ShareSave scheme is limited as you can get your money back if the share price falls below the share option price, you’ve missed out in the opportunity to put the money in a savings account instead, which would have paid some interest.
Until you reach the end of the saving period, you don’t actually own the shares yet – so during the period you’re saving for them you won’t earn dividends as if you owned the shared directly.
If money is tight enough that you may need what you would otherwise commit, whilst you can often pause your contributions for short periods, you may decide having the cash now is more important than longer term gains.
You have a lot of single name exposure
When introducing investment products elsewhere on the site, we highlight the important of diversification and investing in many different things. Whilst you’re getting the advantage with Sharesave of a discount on your company shares, as it builds up you can also end up with your exposures being reliant on your companies performance!
We think taking part in a ShareSave scheme (if it has a 20% discount on the share price) is absolutely worth it.
That provides a huge cushion against you potentially losing out, whilst you can make some fairly serious gains if your company does well. When you consider that you can also make tax relief savings as well, it’s close to a no-brainer.
The only strong reasons we can see not to take part are if your finances are at the point where you absolutely need the money (for instance, we’d recommend paying off any costly debt before focusing on savings) or if you have expectations that your company is going through tough times and the outlook for them will continue to be very poor.
Any questions?
There’s a lot to consider with ShareSave but we hope you’ve found our guide useful! If you have any questions or have made any particularly good gains from Sharesave then let us know in the comments below.
And that’s it!
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