There are two stages to employee save as you earn share option plans. In the first, carefree part, you, the employee, are cocooned from risk and from the burden of tax. You save your money and the worst thing that can happen is that the shares won't be worth buying at the end of the three- or five-year term. If that's the case, you will pick up the tax-free bonus and all the money you have saved. There will be no income tax bill to pay.
But if you choose to exercise your option to buy shares at a discount, then in this second part you face two new burdens: the risk that your investment could fall in value, and the possible creation of a tax bill. These aren't reasons to not proceed; they are simply things you should factor in.
Your choices upon exercising the option to buy shares will be to sell the holding immediately, to hold for selling later, or to transfer the shares into an Isa or a pension.
If you sell immediately - or later - there may be a capital gains bill to pay. Certainly, if you make 'life-changing gains' through an employee share save scheme, you are very likely to find yourself wandering into capital gains tax territory where HMRC will be waiting to take its share of your gains. This is even more true now that the amount that can be saved in SAYE schemes has been doubled to £500 a month.
However, although you may have made a profit, you can reduce the chargeable amount by deducting the cost of purchase which will be the exercise price under the option through which you acquired the shares, and which was set at the start of the SAYE contract/option arrangement. You can also make use of your annual capital gains tax allowance (currently £11,000), and you can sell your shares in stages to make use of more than one year's allowance. You can also transfer shares to a spouse or civil partner to make use of a second annual exempt amount.
Any gains after that will be taxed at either 18 or 28 per cent depending on how much taxable income you have in the same tax year.
You can avoid capital gains tax altogether by transferring the shares into an Isa, assuming you haven't already used up your annual allowance. In the tax year to 5 April 2015, you can put up to £15,000 of shares (after 1 July) into your Isa. You must place the shares into an Isa within 90 days.
For larger amounts, says John Hodgson, tax partner at Smith & Williamson, an alternative to an Isa is a transfer to a personal pension, although the usual pension contribution limits apply by reference to the market value on the date of transfer.
It's not unusual for employees to save into a number of schemes over the years as companies often offer them on an annual basis. If your shares are held outside an Isa, when you come to sell batches of them, you won't have a choice over which year's shares you are selling - there are rules which decide this for you. Basically, shares acquired on the day of disposal are matched, then shares within a 30-day period of purchase and disposal are matched. Finally, all shares of the same class in the same company bought after 6 April 2008, are lumped together and each share in this holding (known as a Section 104 holding) will be treated as if acquired at the same average cost.