How to use SAYE and SIP schemes to multiply your money

Are you looking for new ways to save for the medium to long term beyond obvious options such as individual savings accounts (ISAs) and private pensions? If you work for one of the 1,000-plus employers in the UK that offers an employee share scheme, joining it could make sense. These schemes, which must be aimed at all employees (not just top executives), can even be combined with ISAs to maximise tax efficiency.

There are two options here. The simplest scheme is a save-as-you-earn (SAYE) plan, sometimes known as Sharesave. You save up to £500 each month into the scheme’s nominated savings account, typically for three to five years; the money usually attracts a fixed rate of interest, and some schemes offer a tax-free bonus at the end of the plan. At this stage, you can invest your savings into shares in your employer at a price agreed before the plan began. This price can be set at a discount of up to 20% of the share price at the start of the scheme.

Minimal risk with SAYE schemes

If your employer’s share price is higher than this “strike price” when you’re ready to buy, you’re sitting on an instant windfall; you can use your savings to buy the shares and then sell at an immediate profit, or hold on in the hope of further gains. Alternatively, if your employer’s shares have fallen since the scheme began, making the strike price look expensive, you can simply ask for your cash back.

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SAYE schemes, then, are more or less risk-free. Your cash savings may lose value in real terms if you can’t cash them in at a profit – if inflation outstrips your interest income – but there’s no potential for them to drop in nominal value. If you leave your employer before the scheme reaches maturity, you normally get your cash back in full.

Share-incentive plans (SIPs)

The alternative, favoured by some employers, is a share-incentive plan (SIP). In a SIP, you can invest up to £1,800 a year in shares in your employer, with the money coming out of your salary before income tax and national insurance are deducted; that’s effectively tax relief on your investment, although you must hold the shares for at least five years to retain this advantage. After five years, you can sell up; profits are potentially subject to capital-gains tax, but only gains accrued after the five-year period count towards this calculation. The exact terms of your SIP will depend on your employer. Some companies offer free matching shares in line with your contribution; they’re allowed to give you stock worth up to £3,600 a year. And some run dividend reinvestment schemes, enabling you to use the dividends paid on the shares you’ve bought to make further investments. There is more of a risk with a SIP. You’re investing in shares that may fall as well as rise. But the up-front tax perks ease this risk somewhat – and if you qualify for free matching shares, that will also make a difference.

SAYE plans, SIPs and ISAs

Finally, don’t overlook the potential to use ISAs alongside these schemes. With both SAYE plans and SIPs, you have 90 days to transfer your shares into an ISA at the end of the scheme’s term; this will ensure any subsequent income and profits are sheltered from tax. But the value of the transfer does count towards your £20,000 ISA allowance in the year you move the investments.

One last question to consider with employee share plans is whether you’re at risk of becoming too dependent on your employer (relying on it for both your earnings and your investment growth) – although diversifying your investment portfolio through other holdings will certainly help.

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