Share scheme confusion

Tesco's new share scheme is bewildering some workers

This week sees the government launching a campaign in support of a new company share scheme.

Called an All Employee Share Ownership Plan (AESOP), it offers workers the chance to invest in shares in a tax-efficient way.

But it is causing confusion.

Tesco employees, who have recently been offered the new scheme, told Working Lunch they were "flummoxed".

Split

The company already offers a tax-efficient way of buying shares called Save As You Earn. Now it's tempting its workforce with the new scheme, which it is calling Buy As You Earn.

Sara Young, who works for Tesco in Southampton, asked: "Should I split my savings between the two?"

The answer, unfortunately, is a resounding perhaps.

So far, Tesco employees have done spectacularly well out of their share perks, because the shares have performed better than most and the benefits are tax-free.

Millions of workers from different companies already take advantage of Save As You Earn (SAYE) plans.

These allow you to put off the decisions to buy shares until the last moment.

SAYE terms are relatively simple:

First you set the price for buying your company's shares - a discount of up to 20% of the price when you start the scheme.

Then you start contributing, up to £250 a month.

Three, five or seven years later you can buy the shares tax-free at the original discounted price.

Or, crucially, you can just take out your contributions as cash with interest.

Win-win

Fred Hackworth of the Employee Share Ownership Centre describes SAYE as a "win-win".

SAYE is a "win-win" according to Fred Hackworth of the Employee Share Ownership Centre

"Either the share price goes up and you get the benefit," he says, "or you walk away with your savings, plus interest."

Of course, once employees buy the shares, they take the same risks as any other shareholder.

Many Railtrack employees bought Railtrack shares with their SAYE money, only to see the price drop afterwards and the company fail.

New scheme

The latest scheme Tesco is offering, Buy As You Earn, is a version of Gordon Brown's new All Employee Share Ownership Plan (AESOP). It's much riskier than SAYE.

The general rules of an AESOP are:

You can put in up to £125 a month taken from your pay before it is taxed.

The money's then used to buy shares up front in your employer.

The employer can give you a free share for every one you buy - though Tesco is not giving free shares yet.

You can take the benefits tax-free for five years after you've left the plan. But if the shares don't do well, there is no option to take cash instead.

Risky

Fred Hackworth points out that since employees have to buy shares at the outset in an AESOP, they are much more vulnerable to any downturns.

"The share price might dive or the company go bust," he says. "And the employee would lose all the money in the plan."

Tesco finance director Andrew Higginson: "This is a tax-efficient way of buying more shares."

Tesco is offering its new AESOP, or Buy As You Earn, to 180,000 staff.

But finance director Andrew Higginson says he regards it as an add-on for people who already have an SAYE plan.

"If they've got more than £250 a month to invest," Andrew suggests, "this is a tax-efficient way of buying more shares."