Investment Options To Help Reduce Your Overall Tax Bill
The further increase in the highest rate of income tax by the Scottish Government may encourage you to look for investments that will attract tax relief to ease the pain. While there are a number of investments you can make which will reduce your overall tax bill, finding the right one may depend on your need to access the cash in future and your overall assessment of risk.
The most popular and obvious investment option is contributing to a personal pension scheme. A contribution will generally be paid by an individual net of basic rate tax and if you are a higher rate taxpayer, further tax relief will be given through self assessment or PAYE by extending the band of income at which the basic rate of tax is paid. There are, however, limits to the amount of pension contributions you can obtain tax relief on. The annual contribution limit is currently £40,000 with the facility to carry forward unused relief for a period. There is also a lifetime limit which can impact on those high earners in defined benefit schemes. The downside of investing in a pension fund is that you will not be able to access the cash until you reach the age of 55 and withdrawals, other than an element of tax free cash, will be subject to income tax.
Tax reliefs are also available for investing in shares in certain types of company. Generally, these are start up companies and need to meet certain criteria in relation to assets and employees and be carrying on a qualifying trade. One such scheme is the Enterprise Investment Scheme (EIS). The investor will receive a reduction in their income tax liability equal to 30% of the amount invested. The maximum amount that can be invested is £2m and relief will be withdrawn if the shares are sold within 3 years. Another benefit of EIS is that any gain made on the sale of the shares after 3 years will be exempt from Capital Gains Tax (CGT). A similar scheme, called the Seed Enterprise Investment Scheme (SEIS), is available with income tax relief available at 50% of a qualifying investment but with an annual investment limit of £200,000 from April 2023 (previously £100,000).
Venture Capital Trust (VCT) companies also provide investors with tax relief of 30% of the investment with a maximum investment of £200,000 per year. In addition, any dividends paid by VCT’s are exempt from income tax.
You should always seek independent financial advice to ensure the underlying investments meet your own risk profile and from part of a balanced portfolio. Should you wish to discuss your own circumstances, please get in touch with our EQ Taxperts by calling one of our offices or emailing [email protected].