WORKERS are being urged to take another look at employee share schemes after the Treasury increased the interest rates to their highest level in nine years.

From the beginning of this month, employees who start a scheme will benefit from higher tax-free bonuses. The change is expected to benefit more than 500,000 people.

Bonus rates on a five-year scheme will jump from 3.46% to 4.48%. The last time they were this high was in October 1998.

To earn a similar return on a savings account, a higher-rate taxpayer would have to receive 7.5%.

However, workers who have already opened a scheme will not benefit, as rates are set before a scheme starts.

Fiona Downes, head of employee share ownership at Ifs ProShare, which promotes the schemes, said: “The revised rates will allow employees to buy more shares under the scheme or receive a greater return on their savings. This should encourage greater take-up of what is already a very tax-effi-cient savings mechanism.”

There are 96 companies in the FTSE 100 which offer an employee share-ownership scheme, and hundreds of other companies across the UK. About 1.7m employees participate in such schemes, contributing an average of £70 a month.

Workers can save between £50 and £250 a month out of their pay packets for three or five years. There is also the option of keeping money in the scheme for seven years, to benefit from further growth.

Some companies may have a lower minimum monthly payment, allowing you to contribute as little as £5 a month, but £250 a month is the maximum.

The rates for a three-year scheme have gone up from 3.19% to 4.23%. For seven years, the rate is up from 3.52% to 4.46%. At the end of the period, savers choose either to use the money saved to buy shares or have their contributions returned, plus the interest.

The option price – the price at which you buy the shares – is set at the outset and will usually be at a discount of up to 20% of the share price at the time.

Though existing SAYE savers will not benefit from the new rates, they can start a new scheme with the same company.

You can open as many schemes as you like as long as you do not exceed the maximum £250 a month when all payments are combined.

If you have just started a share-save scheme, you should not assume that you would be better off cancelling and starting a new one. Most companies offer the scheme only once a year. You should also consider the rate at which shares are being offered. If you have to wait six months to restart a scheme, there is no guarantee that the option price will not change.

If your company’s shares fall in value by the time your plan matures, you do not make a loss because you still have the option to take your savings in cash, plus any bonuses – a safety net not offered by the stock market.

If you make a profit on shares acquired through the scheme you will be liable to capital gains tax on more than £9,200. However, business-asset taper relief can be applied to the gain to reduce the tax bill significantly.

You have to continue to work for the company to claim business-asset taper relief on your gains. If you bought shares in your company five years ago and you leave or retire now, then sell them in five years’ time, only half of your gain will qualify.

Taper relief reduces the portion of the gain that is taxable from 100% if you held the shares for less than a year, to 50% for one to two years and 25% thereafter.

So if you made a profit of £10,000 and sold the shares after less than a year, you would pay 40% tax on the whole amount, or £4,000, assuming you were a higher-rate taxpayer.

If you held for one to two years, you would pay £2,000 and if you held for two years or more the capital gains tax would be just £1,000.

These examples all assume you have used up your capital-gains tax allowance of £9,200. For further information about employee share ownership in general, you can go to www. ifsproshare.org.

PUTTING CASH INTO THE COMPANY

Save as you earn schemes are a way for employers to encourage workers to invest in the company they work for. Employees can save between £5 and £250 a month for a period of three or five years. The new rates are 4.23% for three years and 4.48% for five years. The rate for the seven-year savings option is now 4.46%. The bonus is paid at the end of the term and is tax free. At the end of the contract, employees can take their money or buy shares in their firm. The share price is set when the contract starts, normally at a 20% discount. Savers who leave before the contract period, but after 12 monthly contributions, will earn 3% interest.