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Share necessities

Share-saving schemes have been a very successful initiative to encourage greater employee engagement with companies they work for and to boost equity ownership. They have been a well received employee benefit at many companies and financially beneficial for many people.

However, falls in share prices over the last year or so mean that many people have maturing schemes where they are running losses. Reinvesting the proceeds in a pension will both maintain the investment through any recovery and give a boost to the value through tax relief. Tax rules allow direct transfer of such shares into a pension.

There are two main types of scheme. Share incentive plans allow employers to award up to £3,000 of free shares to an employee in a tax year. In addition, employees can buy up to £1,500 of “partnership shares” in a tax year and the employer can add up to two matching shares for each partnership share, making a maximum of £4,500 in partnership shares in any tax year.

Also, up to £1,500 of dividends paid as shares can be retained in the scheme in each tax year.

Employees pay for their partnership shares from gross earnings so are not immediately liable to income tax and National Insurance. If shares are retained in the share incentive plan for five years (three years for dividend shares), there is no liability to income tax, capital gains tax or National Insurance contributions. Shares can continue to be held in the scheme beyond the five-year point.

Save as You Earn share option schemes allow employees to contribute up to £250 a month out of net pay over a period of three, five or seven years. At the end, a guaranteed bonus is added which has typically been equivalent to 2.5-3 per cent a year.

The individual then has the option to buy shares at a fixed price, normally 80 per cent of the share price at the start of the savings period.

The bonus and the extra value from the share option are not subject to income tax or National Insurance. However, there is a potential capital gains tax liability arising from the share option. In many cases, this will be covered by the annual CGT exemption.

Both types of share scheme can be rolled over into a Sipp. This must be done within 90 days of the shares from a share incentive plan being transferred to the individual or the SAYE share option being exercised.

Transferring the shares into the Sipp results in tax relief of 25 per cent of the value of the shares being added while higher-rate taxpayers can also claim a further 25 per cent (20 per cent of the total in the scheme including tax relief) as part of their tax self-assessment. This makes share incentive plans particularly tax-efficient because partnership shares were bought out of gross earnings but still qualify for tax relief when they go into the Sipp.

The facility for Sipps to take shares from employee schemes is increasingly common and this could be an attractive option for clients who are considering what to do once the shares become available.

Ian Naismith is head of pensions market development at Scottish Widows

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