IFS PROSHARE, which monitors employee share ownership, wants the government to make Save As You Earn schemes exempt from capital gains tax after it revealed that more than 250,000 employees will be worse off when the new CGT rules take effect next April.

Fiona Downes at IFS said: “When the chancellor first announced these changes in the prebudget report, we made it clear that thousands of SAYE participants would be affected. If the government wishes to continue encouraging medium and long-term saving through employee share ownership, then action is needed to address this issue.”

SAYE schemes allow employees to pay in up to £250 a month for three or five years, after which they get the option to buy shares in the company they work for. The shares are sold at a discount of up to 20% to the price when they started the scheme.

CGT is liable on any profits above £9,200. However, shares owned through SAYEs are classed as business assets. The taper-relief system means that a higher-rate taxpayer will pay 40% tax on any gains above £9,200 if the asset is sold within one year. After two years, the rate drops to 10%.

If you buy shares outside a SAYE, they are classed as nonbusiness assets. Taper relief on this type of investment is less favourable than business taper relief. If you sell within three years, you pay tax on 100% of any gain above the annual CGT exemption. After three years, the tax liability reduces by 5% a year down to 60% after 10 years. This means a higher-rate taxpayer in effect pays 24%.

Taper relief will be abolished next April and CGT will be charged at a flat rate of 18%. The new system will therefore benefit higher-rate taxpayers who own nonbusiness assets, while those in SAYEs will lose out.