Tax Planning and Investments

10 Feb

There are three ways to maximise potential returns and achieve clients’ goals. This is through competitive pricing, tax planning and investment returns. So, we need to control costs and attract rebates (wherever possible), pay the minimum amount of tax possible and finally, the performance of the investment portfolio.

Investors can make their Tax Allowances and Reliefs stretch further with some lateral thinking.

The end of the tax year on the 5th April is the cut off for the current tax year for Pension Contributions (£50,000), ISA Allowances (£10,680), VCT (£200,000) & EIS (£500,000). By combining Reliefs you can maximise the tax benefits generated.

 

Personal Planning

1.  For example, for a 40% tax payer – making annual pension contributions of £40,000 will create immediate tax relief of £10,000 plus relief through your self assessment of a further £10,000 (total of £20,000). If this £20,000 was invested in VCT, then the £20,000 investment would attract further income tax relief of £6,000 (but the investment must be held for 5 complete years).

In this example, tax savings total £26,000 leading to the initial £40,000 investment creating £60,000 of investments. This is only effective if you have a tax bill of at least £26,000.

2.  For example, for a 20% tax payer – making annual pension contributions of £30,000 will create immediate tax relief of £6,000. If this £6,000 was invested in VCT, then the £6,000 investment would attract further income tax relief of £1,800 (but again the investment must be held for 5 complete years).

In this example tax savings total £7,800 leading to the initial £30,000 investment creating £36,000 of investments. This is only effective if you have a tax bill of at least £7,800.

Company Director Planning

An alternative way to look at the same information is, the above strategy could be used in combination with taking higher dividend payments from a limited company. If the dividend distribution leads to 32.5% on the share distribution to be paid by rolling the payment (or possibly part payment) into such investments could mitigate the additional tax payable.

3. For example, lets assume that you draw dividends up to the threshold for higher rate tax, take a further dividend payment of £50,000 creating an additional rate of tax of 32.5%. The 10% income tax credit is already included  so a further taxable amount of £12,500 will be due. By investing this in, say, the VCT will create a tax rebate of £15,000. So mitigating the additional tax and £2,500 of existing income tax payable.

 

Additional Information

Planning is all about making the best of the money available. Careful consideration must be taken with respects to the investment product chosen.

Pension investing – asset classes can be mixed so that the underlying portfolio can be designed to reflect your chosen risk profile. On the initial investments there is Basic Rate Tax Relief at Source and any further taxation is reclaimed through your Self Assessment. When you crystallise your benefits and draw an income, either directly from the fund or via the purchase of annuity, the income generated is treated as earned income for tax purposes i.e. all the income is assessed to determine the tax payable.

Whereas Venture Capital Trusts (VCTs) are listed companies who invest in small, higher risk UK companies and must be held for a minimum of 5 years. If they are encashed earlier the tax relief will be clawed-back on a pro-rata basis. These investments attract income tax relief of 30% on the capital invested, any dividends payable are free of tax and the maximum investment is £200,000 per person per tax year.

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