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If you're one of the seven million people (a quarter of the workforce) who work in the public sector, stop reading now. Furthermore, if you're self-employed or a sole trader, then you won't find this article of much use. However, if you work for a private or stock-market listed company, then read on, because investing in the shares of your employer might make you seriously well off one day! According to ifsProShare, there are over five thousand UK companies which offer HM Revenue & Customs-approved employee share plans to their workforce. ifsProShare estimates that around 3½ million employees (about an eighth of the workforce) either own shares in their company or participate in a share-based incentive plan. However, many more people are eligible to join these schemes, and the good news is that they provide fairly generous tax breaks for employers and the employees who participate. I shall ignore 'selective' share plans which are only available to certain employees (usually managers and directors) and, instead, review the two main schemes open to all employees: Sharesave and Share Incentive Plans. Sharesave (savings-related share option plan) Sharesave is also known as Save As You Earn (SAYE) or Savings-Related Share Option Scheme. There are currently over 1,300 approved Sharesave schemes in operation, with 2.6 million members. Under Sharesave, employees are given an 'option', which is a right to buy shares at a future date at a price determined just before the option is granted. The company can set the option price as much as a fifth (20%) lower than the market price. Sharesave members save between £5 and £250 a month for three, five or seven years via payroll deduction. When the plan matures, participants can use this cash, plus a tax-free bonus, to buy the shares at the original discounted price. The tax-free bonus ranges from 1.4 monthly contributions (worth 2.49%) for three-year plans to 8.4 monthly contributions (2.91%) for seven-year plans. To show you how they work, here's a three-year Sharesave contract offered in December 2002 to workers at GlaxoSmithKline (LSE: GSK), in which I own shares: Market price: £11.45 Discount (20%): £2.29 Option or 'strike' price: £9.16 Gary elects to pay £250 a month into this plan, a total of £9,000 over three years, and he earns a bonus of £450 (1.8 contributions was the bonus in 2002), a total of £9,450. When his Sharesave matures in December 2005, Gary sees that the market price for GSK shares is £14.78. Hence, he elects to use his entire £9,450 to buy shares at the discounted price of £9.16, so he receives 1,031 shares, plus £6.04 in spare change. So, over three years, Gary has turned £250 a month into shares worth £15,238.18 and cash of £6.04, a total of £15,244.22. This equates to an annual return of almost 38% a year, which is an awesome, market-beating return (and it's likely to be free of Capital Gains Tax, too)! Learn more about Sharesave. Share Incentive Plans (SIPs) With SIPS, companies can offer the following share-based incentives to all employees: Free shares Each year, employers can give each employee shares worth up to £3,000, free of income tax and National Insurance Contributions (NICs). Partnership shares Employees can buy shares, free of income tax and NICs, worth up to the lower of £1,500 a year or a tenth (10%) of pre-tax annual salary. Matching shares Employers can add up to two free shares for each partnership share an employee buys. I know one person who contributes the maximum £1,500 a year into partnership shares, which only costs £885 of take-home pay, thanks to a tax break worth £615. In addition, the employer matches shares one for one, so £885 buys £3,000 of shares each year. Over three years and with dividends reinvested, this plan has amassed shares currently worth around £15,000. All this for just £71.75 a month -- wow! Learn more about SIPs. So, investing in your own company can pay off big-time -- and could even make you a millionaire if the company does well. However, don't put all of your eggs into one basket, because even the best-run companies slip up sometimes! More: Buy and sell shares cheaply in our Broker centre | Put money or shares into this tax shelter. Cliff owns shares in GSK.
