Salary sacrifice Tesco shares Vs pension

One of my lads has approached me.

He does 4-5 days at week at Tesco.. He’s wanting to buy a house. Has maxed LISA last year and this year. Has very good amount in savings @ 6%. No debt other than student loan. He’s 21.

He’s paying minimum into Tesco auto enrollment pension.

He’s been offered Tesco shares on salary sacrifice.

The sums are not huge, paying IFA isn’t going to be worth it.

So, bearing in mind he doesn’t pay much tax, is there a way of calculating how much he could add to pension or buy in Tesco shares to reduce his income tax burden back to nil?

Would you go Pension or Shares?

I’m leaning towards shares as he can access them before he is 70…but then paying into a pension now with nearly 50 years of working life to compound the interest…

You would have to pay tax on the shares at some point, either when you buy them (appears not) or when you realize them into cash. Unless your sacrifice deal allows you to buy them at less than cost price I wouldn’t bother.

Pension isn’t much good if he wants to buy a house with the cash, I’d just be using a normal isa as it has the same tax shelter as the Tesco scheme but more flexible

Interesting about tax on shares. Is that on gains made?

They are salary sacrifice, so NI and PAYE saved.

The paye and ni will (I think) be due when you cash in the shares, otherwise we’d all be getting paid in shares
It’s also worth noting he will probably not be able to get down to zero tax due to his hourly rate going below minimum wage (assuming he works close to full time)

Edit : looking at the schemes here https://www.tescoplc.com/sustainability/colleagues/reward there’s no tax savings

double edit : I misread the above, the tax implications of each are noted in the table here https://frazerjames.co.uk/company-share-schemes-an-employees-guide/

2 different schemes @matt_outandabout (just in case not aware)

Save as you earn & Buy as you earn.

You could get him to get all the info on the ‘Colleague Help’ site to help you with more info, if he hasn’t already. If he has/you have, ignore, nothing to see here😂

Big risk taking salary in tesco shares, if the company tanks he could lose his job and his savings in one go. Ignoring any tax issues, just looking at risk management.

Probably better to invest in sainsburies 🙂

(Better still, something unrelated to grocery retail.)

Take the shares, they will be almost certainly be in a share incentive scheme which offers in practice the same tax benefits as a pension scheme on the way in and more flexibility and probably better treatment on the way out. Tesco shares are in some analyst’s views under priced and have a decent yield.

[EDIT: Under these schemes, the company can offer free shares as well so the actual cash value may be higher too]

We need detail ( or at least you/ he needs detail ) of the schemes.

My company does three ( frankly ridiculous) schemes:

I can buy £150 shares each month with pre tax salary. So long as I keep them for 5 years then I pay no tax on them or the gains. Oh and the company also chucks in £50 pcm to further sweeten the deal.

Or ( actually also) I am putting £300 pcm into an option.  Though this is post tax, the upside is that at the end of five years I can either buy the shares at the option price, and sellem immediately, or just take my money back.. given that the shares are currently trading at 250% of option price, this is rosy.

All of which would seem to suggest at first glance that shares would be a no brainer, until you realise that my company also chucks 13.8% company NI contribution on top of any money I put in my pension, which effectively doubles any contribution I make

So, devils in the detail, find out exactly what he gets from each.  Fir starters I guess he ain’t higher tax bracket, so pension perhaps not so good.

I’ve lost out to those share save schemes twice, not massively because I sold chunks when they became available, but like any shares in a single company its a risk that you don’t always see coming. The current shares are bollocksed due to the Ukraine war and the effect it had on European gas supplies. Not much even the best run company could do to mitigate that.

I’d go pension.

I’d go pension.

Just because he’s saving for short/medium term stuff (which is great, good on him), like a house deposit, doesn’t mean he doesn’t also need to be thinking about (very) longer term stuff like a pension. And the sooner he gets money into a pension the better, compounding being what it is.

Cheers all

We’ve been reading – the only scheme open at the moment is the ‘buy shares on salary sacrifice. PS you may pay capital gains.’ scheme.

So we’ve done back of an envelope and worked out how much to lob in a pension and increase the monthly into the savings account.

my wife has done very well out of her works share schemes. she can only sell 15k a year i beleive before she pays any tax or something like that, so dont assume it will be taxed.

id go shares because the pension is locked away. once you have the shares you coukd always choose to reinvest into a pension. cant do it the other way around

my wife has done very well out of her works share schemes

Thing is, there are also people who have done very, very badly. They generally have to need held for five years to get the tax benefit, and five years can be a long time in terms of the health or profitability of a company.

I know a guy who has shares that, having worked for a place for years and done the share scheme each year, had shares that cost him in the tens of thousands that are now effectively worthless.

He is exceedingly unlikely to pay capital gains tax, there is a separate and substantial tax free allowance every year, whereas he will have to pay tax on the pension albeit a long way in the future – taking the shares is a no brainer.

The paye and ni will (I think) be due when you cash in the shares, otherwise we’d all be getting paid in shares

Surprised nobody has rebutted this. If the scheme is set up well I’m pretty sure you don’t pay tax and NI.

And WRT your second clause, I hate to say it, but the “we” that makes the rules and runs the country is and does.  The vast majority don’t, either because their company doesn’t bother to offer it or they don’t have hundreds of quid spare each month to invest.

Like pretty much everything in this country, it’s there to benefit the well off 😟

I know a guy who has shares that, having worked for a place for years and done the share scheme each year, had shares that cost him in the tens of thousands that are now effectively worthless

But that’s surely due to his stupidity rather than the scheme

.. ( or the scheme is extremely ridiculously generous)

AFAIK most salary sacrifice schemes only allow a max of around £250 pcm don’t they? So that’s only £15,000 until he can start bleeding them out and diversifying.

If he didn’t do that, and instead kept them all with his employer then…..

“He is exceedingly unlikely to pay capital gains tax, there is a separate and substantial tax free allowance every year”

It’s been reduced to £3000

“It’s been reduced to £3000”

Thanks I had completely forgotten that, in the context of the likely amount involved (max £3,600 a year of shares) it should still be sufficient to cover gains and they are tax free if you retain them in the scheme for five years.

The employer saves on their NI too- I’d be interested to see if any of that is passed on through the share scheme.

I worked at one place that paid pension as a salary sacrifice so employee saved NI & PAYE and the employer didn’t pass on any of their NI saving. Current employer has pension set up the same but they increase their contribution to pass on some of their NI saving .

I’d also look at what happens if you leave before the shares vest. When I worked for Cadbury, there scheme paid interest on what you had contributed of you left before the 5 year term.

I’d say buy some of the company shares and pay some into pensions. It’s all about diversification- investing – IMO. Pensions are low risk but to have some other investments isn’t a bad idea. The company shares are certainly more flexible for lifetime requirements than a pension. Who know how old you will need to be before today’s 21yr olds can draw a pension.

Nobody knows the future but investing in Tesco should be far less risky than a small company’s shares.

I used to be able to salary sacrifice plus buy stock at a discount or take options. From memory, they were tax free if you remained an employee and held them for a minimum term. IMO options are better if they are also available. There is always one old boy that knows the scheme inside out lurking around, just got to find them.

I saw many older folk get wiped out in the run up or close to retirement around 08 that didn’t think it was possible in the run up. The irresponsible ones that blown their retirement money on classic cars all did quite well.

I knew a guy who must have done something similar, saved with workplace scheme, invested his pension as well (I think) into the same company. Seemed odd to me, and sure enough – it was HP and he lost a ton of his savings (and his job, latterly).

Saveshare/Sharesave are practically risk free. I use to have the same scheme at my employer but they’ve pulled it.

You buy them pretax i.e £100 a month at the opt in price, I think this is a spot rate and then discounted a bit.  Normally opens once per year, mine was September I think.

Three or five years later you exercise your option. If shares have underperformed and no profit you simply get your cash back (60 months * £100 so a nice lump sum)

If they’ve risen in price, you opt to sell (or keep them) and make a nice profit. No tax unless they’ve really done well (one scheme mine went from 61p to about £3.50), if you do go over the limit you can just leave some shares in until next year.

The only risk as I understand it is if the share price collapses in the few days between giving your instruction to sell and them actually selling.

I always had 5 schemes running with one maturing each year, had a couple of windfalls, never lost a penny. Gutted they’ve removed the scheme from us.

So check out when his scheme opens and perhaps don’t lock all his free cash into pension if it’s of interest.  After all, if he is saving for a house and any extra deposit gets a better interest rate, that’s way more useful than a bit extra in the pension, he can always lump sum into it in a few years when he has a house.

PS I think total salary sacrifice will be limited to avoid going under minimum wage. So that will include bike to work scheme etc.

My scheme also lets you cancel at any point and get any contributions back in case he needs it.

Three or five years later you exercise your option. If shares have underperformed and no profit you simply get your cash back (60 months * £100 so a nice lump sum)

They don’t all work that way Spooky. Mine, you actually buy the shares and have to retain them 5 years to get the tax relief, or pay normal income tax rate on the sale.

They’re current down about 90% from just before Putins War.

Emigrate to a country where buying a house is a realistic possibility before he retires.

Share save can be reasonably low risk if you sell the shares immediately as you’ve bought them. If you don’t do this, the shares can tank. If you’re lucky then the shares go up, but this would count as a capital gain. The tax free allowances for capital gains have been slashed recently, so far more folk will be getting caught. I do wonder if the success stories up there are taking CGT into account? 😉 As a last thing… With these schemes they’re typically taxed as income. As @5lab states, if they weren’t, they’d be a very handy loophole.

One thing to mention is that you still need to be above National Minimum wage after any kind of salary sacrifice scheme (pensions/shares/etc)

If hes not paying much tax at the moment, then these might not be options which are available to him.

Does salary sacrifice impact on affordability calculations for mortgage?

They don’t all work that way Spooky. Mine, you actually buy the shares and have to retain them 5 years to get the tax relief

That’s what my firm (and presumably others too) would call Directshare…different scheme.

Buy in bulk from pretax salary, locked in for a length of time and then sell subject to tax, or keep longer to sell tax free.  I bought some during covid and whilst they haven’t lost me any money, they’ve not made anything either! Irrelevant anyway until they are available to me.

I’m just amazed that at aged 21 and working 4-5 days a week in Tesco he is already saving 4K per annum and looking to invest more, very impressive.

I did a bit more reading and there are some fairly limited loopholes for tax around this – it looks like you can dodge tax on up to £5.4k per year of “income” – you can invest up to £1800 and your employer can gift you up to £3600.

https://www.gov.uk/tax-employee-share-schemes/share-incentive-plans-sips

You can also dodge tax on the profit made on a save as you earn scheme, which thus looks more like an isa (£500 per month limit). There’s a few other dodges I was unaware of in that link as well.

In his situation, the risk of the employer going bust is low, but I think I’d want to diversify my house savings more broadly than with a single company

I know a guy who has shares that, having worked for a place for years and done the share scheme each year, had shares that cost him in the tens of thousands that are now effectively worthless.

Previously when the scheme ‘matured’ I either took the cash (as it was worth more) or sold the shares on the day – and also have worked with someone who just getting buying them and then lost loads (as well as their job) when the company went ‘pop’.

A bit like how I’ve never lumped all my pensions into the same ‘scheme’ – currently got 7 on the go.

Does salary sacrifice impact on affordability calculations for mortgage?

I believe it does as you are technically earning less, so you can borrow less based on whatever multiple the mortgage provider is working with.

I’m just amazed that at aged 21 and working 4-5 days a week in Tesco he is already saving 4K per annum

Can I check where the £4k value came from?  I keep looking but can’t see where it is inferred.

But yes, I agree with your sentiment.  So much so that I doubt the following is true:

but then paying into a pension now with nearly 50 years of working life to compound the interest…

If he’s already saving this much he ain’t going to need to work till 70 😁

^^^ ‘Has maxed LISA last year‘…

these have a 4k per annum contribution ceiling

Can I check where the £4k value came from?

I assume from maxxing out the LISA

Does salary sacrifice impact on affordability calculations for mortgage?

the last time I had one it just counted as an “outgoing” – but tbh on most schemes you can stop salary sacrificing fairly quickly, so (assuming buying the house is a few years out) – you can sacrifice for now then go back to full pay a few months before buying the place

He’s a fortunate boy. He worked full time through the pandemic at the COVID test centre, amazing salary for a school leaver. Since then he has earned through college part time and now full time. Lives at home on a realistic ‘rent’ which we are helping him save most of. Doesn’t run a car. He’s quite frugal. So he’s both self-made and able to save.

Savings are 50% of salary, plus anything left over at end of month. And he is now maxed on pension matching at 7.5% from employer as well.

He should be able to afford his own modest flat or house in two years. Salary multiples for the loan will be the constriction.

4k per annum contribution ceiling

😄 Cool..I had this gut feeling it was in there somewhere, but couldn’t find it.  Now my sprog is 18 I guess I ought to get one.

“In his situation, the risk of the employer going bust is low”

It’s not just going bust, but any sort of shock – which may be due to some misadventure in the business plan, such as an overly ambitious expansion – could easily tank the stock at the same time as they sell off a few sites with the obvious implications.

His choice his risk, but no-one in their right mind would ever recommend that someone new to share investing should put all their savings into one company, and that one company also being the one that provides his wages just makes the risk even worse.

Sure if there’s a massive benefit (either in terms of tax relief or additional company contributions/discounts) then it might be worth doing but I’d certainly be looking to take the money out of the scheme at the soonest possible opportunity. And put it literally anywhere else (well ok not c&h).

He’s a fortunate boy.

Sounds like he’s smashing it tbh. Get him on Mr Money Mustache or Monevator early and he’ll be “retired” before you know it.