Should You Say Yes To Save As You Earn?

save as you earn

Note: This post was first published in August 2019 and updated in February 2021

Sometimes it seems there is nothing but obstacles on your road to financial independence

Stagnating pay, high taxes, the ever-increasing cost of living, stock market downturns. Possibly some naughty habits as well.

Take your pick – all of these will all take a bite out of that nest egg you are so carefully building up.

And so, if you are serious about reaching financial independence, you need to use every single wealth-building tool you have access to. 

Thankfully, there are schemes out there that are funded by either the government (gasp!) or your employer – or both – that can provide a boost to your savings.

Some of these (like pensions) work by reducing your tax bill.  With others (Lifetime ISA), the government actually contributes extra money into your account.

Save As You Earn (also known as SAYE) is a scheme where your employer gives you shares for less than they are worth.  This allows you to realize an instant boost to your net worth at the completion of the scheme. 

As a helpful guiding principle in life, anytime someone offers you free money (and it doesn’t involve doing anything dodgy or illegal), you should pay attention.

Pay attention to save as you earn!

Today, let’s do a deep dive on Save As You Earn and see how you can use it in order to reach financial independence sooner rather than later.

What Is Save As You Earn?

Introduced in 1980, SAYE is a mechanism that allows company employees to gain free share options with their employer.

At the beginning of the scheme, the employer sets a price at which the shares will be granted to the employees.  This is called the option price and it is usually set at a discount to the prevailing market price. 

That discount can be up to 20%.

The employees can then choose to contribute anywhere between £5 and £500 a month into the scheme.  Sometimes the contributions are capped by the company. 

For example, the SAYE scheme I had with a previous employer capped the contributions at £300/month.

The scheme lasts either 3 or 5 years.  At the end of the scheme, the employee can choose to do one of the following:

1. Use the savings in the scheme to buy the shares

or

2. Take their savings as cash

If at maturity of the scheme your company’s share price is above the option price, you should buy the shares as you get to make an instant profit.

However, if the company’s share price has dipped below the option price, you obviously take your savings as cash and run for the hills. 

In the event you leave the company before the scheme matures, you will be eligible to collect your cash but it is likely the company will ask you to forgo your share options.

If, however, you are made redundant, retire, or leave because of an illness – or if your company is acquired, it is likely you will able to exercise your share options.

Let’s run through a few real-life examples to see how this might work. 

Example #1:

Richard works at Acme plc.  He contributes £50/month into Acme’s Save As You Earn scheme, which gives him the right to buy Acme’s shares at a 20% discount. 

At the launch of the scheme, Acme’s shares were trading at £10 and the option price was 20% lower or £8.

At the end of 3 years, Richard has contributed £1,800 to the scheme. 

Acme is no Tesla, but its shares have gone up in price to £15.

Equally, Richard is no Warren Buffet, but he is an avid reader of personal finance blogs.  Thus, he chooses to exercise his right to buy Acme shares at £8.  He buys 225 Acme shares for the £1,800 in the scheme.

However, because Acme’s shares are now worth £15 apiece, Richard’s 225 shares are actually worth £3,375. 

Richard made a tax-free profit of £1,575 or 87.5% on the SAYE scheme. 

Example #2:

Kate works at Widget plc.  She contributes £80/month to Widget’s SAYE scheme. 

Widget’s share price at the start of the scheme was £5 and the option price was 20% lower or £4.

Over a period of 5 years, Kate ended up contributing £4,800 to the scheme. 

However, Widget fell on hard times because of Brexit / Covid / [insert yet another calamity here] and the share price is now £3.  The Reddit traders aren’t riding to the rescue anytime soon.

It makes no sense for Kate to buy shares for £4 if they are only worth £3. 

Kate collects her £4,800 in cash.  No money lost, no hard feelings.

What Are The Advantages of Save As You Earn? 

Unsurprisingly, there are a few.

Free option to make money with no risk

Because shares tend to go up in price over time, the potential gain is comprised of the discount granted at the beginning of the scheme and the gain in share price between the beginning and end of the scheme. 

Because you can choose to take your savings as cash there is no downside (other than opportunity cost). 

Tax advantages

Your SAYE contributions come out of net pay which has already been taxed.  However, the gain you make on the difference between the current share price and the option price is also tax-free

You can also avoid paying taxes on any future capital gains if you purchase the shares and move them into an ISA or a self-invested personal pension (SIPP). 

You should think twice before holding on to the shares, though (more on this below). 

Forced savings

You can stop or pause your share scheme contributions but chances are that once you’ve opted in, you will keep going. 

SAYE allows you to automate your savings by re-routing the contributions into an investment pot before they even hit your bank account.

FSCS protection

The contributions you are making to the SAYE scheme are ringfenced and protected by the government’s FSCS scheme

The limit is £85k which is more than sufficient given the maximum allowable contribution of £500/month.

Better employee engagement

The theory is that employee share ownership fosters employee engagement and contributions. 

In theory, motivated and engaged employees are beneficial to the company’s bottom line which is, in turn, beneficial to the company’s share price.   

Sounds Great So Far – Any Shortcomings? 

Yes – a few.

First of all, the current rate of interest on your contributions to the scheme (which is set by the government) is zero. 

This presents an opportunity cost versus other investment choices.  With SAYE, there is always a chance that all you get at the end of the three or five years is just your cash.

Now, this isn’t an issue if you were to hold your cash in a savings account instead. Heck, it may even be an advantage if we ever get to the bizarro world of negative retail interest rates.

But to the extent you were going to invest the money in equities instead, the opportunity cost can be meaningful.

Secondly, depending on your individual situation you may be better off contributing to other schemes. 

While a 25% potential boost to your savings is attractive, an additional rate taxpayer gets an instant 45%+ boost on any contributions she makes into a workplace pension (subject to the taper and LTA).

Alternatively, you could put the money into a LISA and get a 25% bonus. 

Finally, there is the concentration risk of investing in your employer’s shares. 

To mitigate said risk, you should probably sell the shares the moment you get them, realize the tax-free gain and invest the proceeds into your index fund account. 

Should I Go For a Three or a Five-Year SAYE Scheme? 

According to the FT, four in five employees are on three-year SAYE schemes. 

In theory, you could realize a higher gain on a five-year scheme as the appreciation in your company’s stock is likely to be higher over five years.

Practically speaking, you need to consider both your employers’ prospects as well your expected tenure with the company.

I find five years to be a long time to stay at the same company and hence always opt for three years.      

Is Save As You Earn Right For You? 

Only one in three eligible employees utilize SAYE at the moment.  So are 67% of the workforce missing a beat or is there more to it? 

As ever, the answer is that it depends on your circumstances.  In particular, your tax bracket and your age are two important considerations. 

Your tax bracket

If you are a basic rate taxpayer, chances are that SAYE represents one of the best wealth-building options for you. 

Assuming your company’s share price doesn’t decline, SAYE provides the same level of tax boost to your savings (25%) as contributions to your pension. 

No, you won’t get the employer match or the national insurance benefit. But bake in some decent growth in the share price and SAYE could become even more attractive than making a contribution to your pension. 

The math is slightly different for additional or a higher rate taxpayers.  At either 40% or 45% marginal tax rates, the pension tax break alone would far outweigh the 20%+ boost from SAYE. 

Your age

The gains from SAYE are realizable as soon as your scheme ends, which is in either three or five years. 

You can only collect your pension starting at 55.  If you are younger – and especially if you are looking to retire before you turn 55, a SAYE scheme could boost your non-deferred pot.

It may well be that after considering all of the above, you will decide that SAYE is not the right wealth-building vehicle for you. 

But you sure owe it to your future, financially independent self to do the math.

Happy investing!

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Banker On FIRE is a London-based M&A (mergers and acquisitions) investment banker.  I am passionate about capital markets, behavioural economics, financial independence and living the best life possible.

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12 Comments

  1. I use both Saye and sips. The other issue I hadn’t considered is my 250 a month to a sipp means currently a gain of 13000 meaning capital gains so really useful to know i can transfer to my isa

  2. No an insurance brokers. Shares have just done well. I keep in umming and ahh ing about bunging the other 250 a month in but want the diversification . The sip I’m also up 20% on. My original plan was to keep paying in for 5 years then start to sell as they come up each year. The way I see it they’d have to tank 40 % for me to break even because of the tax breaks. I am wondering whether to just do the 5 years then stop but in the meantime I’m building dividends as well and I figure as long as I’m building wealth outside of this I may as well keep buying. It’s only 2% of my pensions and isa so not over exposed and they’re pretty cash rich so should be OK bankruptcy risk wise. I was considering doing their third option (forget what it’s called now) where you buy every month from net salary for a 5% discount but felt like too much exposure to my company plus no tax breaks

    • That seems like a sensible plan indeed. And well done on building up such an impressive pension / ISA pot – probably puts you pretty firmly towards the top end of the distribution!

  3. Damian,

    Nice explanation of SAYE. Thanks.

    I have used several SAYE’s over the years (with different employers/durations) and have had all sorts of outcomes ranging from very good to not so good. I cancelled one part way through so that I could up the contributions to a newer one with a better option price. And, as explained previously, the worst outcome was down to my mistakes.

    My best outcomes were pretty spectacular and, although they happened years ago, one in particular had a memorable additional boost. That bonus was associated with the fact that the SAYE account (which in those days paid interest – expressed as additional free monthly contributions) was held with a Building Society (BS). The BS happened to de-mutualised so I also got some free shares in the bank it became. I guess this is unlikely to happen again – but you never know!

    All in all, I think SAYE is a good idea, and I have a lot to thank it for. My view however has almost certainly been influenced by my earliest (very good) outcomes. I strongly suspect a lot of participants just do not see the associated concentration risk – so well done for highlighting this aspect.

    • I’m in a similar boat. Two of the SAYE plans my wife and I participated in worked out very well, far beyond the 25% “headline” boost.

      With a third, it was clear six months in we would be out of the money. We ended up canceling the plan and signing up to the next version, at a much lower strike price.

      • Is it correct to infer from this that you and your wife both work (or perhaps at some time worked) for the same employer. If so, then I guess that would add a further dimension to your households concentration risk wrt your employer.

        • Not quite but close. Let’s just say that both of us had significant exposure to the European banking industry at some point. And you are spot on, it was a concentration risk we were very mindful of.

          As a matter of fact, the questionable health of said industry was a big reason for me leaving my first job halfway through the last decade.

  4. Interesting, I’ve never heard of this idea. Why aren’t more people doing this?

    Seems like it would be good for businesses as well. In addition to higher engagement, employee retention is likely to be higher, too.

    I wonder what happens to the money contributed by the employees. If structured and managed correctly, SAYE programs could also provide the company with some short to mid-term liquidity and capital.

    • It’s a UK specific scheme and I don’t think it’s available in other countries.

      The money is ringfenced (and protected by the deposit protection scheme). Letting employers touch it not a great idea as history has shown!

  5. I had no idea that SAYE was actually a thing. Is that a EU thing or does it apply in America as well? I’ve heard of companies offering employees of getting discounted shares but they were actually allowed to sell the shares the day that they got it.

    You have my curiosity now.

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