Yahoo Finance Ask a money expert: I've been offered the chance to invest in an employee share scheme - should I?
I've been offered the chance to take part in an employee share scheme - how does it work and should I do it?
AH, Dundee
Employee share schemes are used to reward staff with company stock, or the option to buy stock in the company at a future date.
Around 10,700 companies operate such schemes, according to the latest government data.
To start with, you need to identify what exactly you are being offered. There are four types of employee share scheme: save as you earn (SAYE); share incentive plan (SIP); company share option plans (CSOP); and enterprise management incentives (EMI).
Around 8,500 of those 10,700 companies offer solely EMI schemes. These can be used only by companies with less than £30m in assets. The number of companies offering EMIs has increased rapidly in recent years, as it is the newest of the four schemes.
However, the number of companies offering the other three schemes has been slowly declining.
SAYE allows you to save up to £500 a month, over a three- or five-year savings contract. At the end, tax-free interest or a bonus may be added to the pot.
You can then either use the money to buy shares at a price fixed at the beginning of the savings period - which can be up to 20pc lower than the price at the time the plan was set up - or take the cash, along with any interest or bonus.
If the company's share price has risen over the savings period, or fallen by less than the discount that applied, you have the option to buy shares at a discount to current value.
You can then either sell them immediately or hold on to them. If you move them into an Isa within 90 days of buying, or into a pension immediately, no capital gains tax will be due if you then subsequently sell the shares.
If the share price has declined to the point that you would lose money if you exercised the option to buy, you can simply take the cash. This makes a SAYE scheme one of the safest ways to invest in shares.
An SIP offers numerous options for your employer to give you shares or enable you to buy them out of your pre-tax salary. No tax or National Insurance is due on that money if the shares are kept in the plan for five years, and there is no capital gains tax on profits if they are kept in the plan until they are sold.
Your employer can give you up to £3,600 worth of free shares a year, or you can buy up to £1,800 in shares each year out of your pre-tax salary. In the second scenario, your employer can then give you up to two free shares for each one you buy. You can also use the dividends from any shares bought or given to buy further shares.
A CSOP is typically used to reward certain employees or executives. Both SAYE and SIP schemes have to be offered to all employees on equal terms - although there may be a minimum length of service specified.
With a CSOP, a company can give an individual the option to buy up to £30,000 worth of shares at a fixed price. If the option is exercised after three years or more, no income tax or National Insurance will be due on the difference between what is paid for the shares and their value.
Lastly, EMI schemes allow smaller companies to grant up to £250,000 in share options to an employee over a three-year period. No income tax or National Insurance will be due if the shares are bought for at least their market value at the date the option was granted.
Patrick Connolly, a financial planner at Chase de Vere, the advisory company, said: "Employee share schemes appear very attractive, but people need to be wary of holding too much of their money in the shares of just one company.
"Investing in individual shares is high risk and this risk is increased if you hold shares in the company you work for, because if it runs into trouble both the value of the shares and your job could be under threat simultaneously."
He said that one option was to sell some of the shares when possible under the scheme you have taken part in and then move that money into more diversified investment funds.
But he said that SAYE schemes offered a "low risk approach to investing" thanks to the option to take your cash back if the share price has not moved in your favour. If you exercise your option to buy the shares, however, you are as exposed to the risks involved as any other shareholder.
