Two things in life are certain, death and taxes. It is often said you cannot escape either, but you can surely reduce or mitigate your taxes. Income tax relief comes in many forms and to have a fully fleshed out tax plan can assure that you keep as much of your hard earned income as possible. Follow the advice below to ensure you reduce your marginal tax rate, or defer as much income as possible or get income tax relief on your investments where possible.
The basic tax rate is 20% of income up to £31,785 with a personal allowance of £10,600. Those that pay higher tax rates start doing so at £42,385 up to £100,000 where the personal allowance gets reduced by £1 for every £2 of additional income up to £121,200 where you have a zero personal allowance. The Higher tax rate is 40% and the Additional rate is 45% over £150,000. The tax burden can become quite high at these higher income rates and saving even 1% at these income levels can be worthwhile.
Income Tax Reliefs
Receiving tax reliefs, no matter how large or small are important to mitigate your overall marginal tax rate. Employ every possible relief to maximize your savings, even if some are ultimately better than others.
If you were born before April 1935 and make payments under a court order to an ex-spouse or partner or for children under a previous marriage or civil partnership can provide a 10% tax relief up to a maximum of £3,220 or £322 worth of tax mitigation a year. Small but, it is still money that remains in your pocket.
The first program to consider is the Gift Aid program introduced to ensure healthy donations to charitable organizations. It allows for anyone to donate and receive an additional 20% basic rate claim. Meaning if you donate £1000 you can actually reclaim on your personal taxes a deduction worth £1,200. If you are in the Higher and Additional tax brackets you can reclaim a higher rate relief adding the additional 20% of tax rate, making the same donation worth £1,400 of tax relief.
The second program is even better for tax savings. The Payroll Giving Schemes supported by certain workplaces offers even better giving incentives. This also benefits higher rate payers more as a £1 donation for an Additional 45% rate payer would only cost 55p and only 60p for Higher rate payers. Effectively the donation is made from your wages pre-tax and lowers your overall income.
Pension Contributions Tax Relief
One of the best ways to get tax relief is by maxing out the contributions to your pension plan that is approved by HMRC. Currently you can receive up to 100% of your annual income in tax relief to a limit of £40,000 in the current year with a callback of up to the previous 3 tax years. However, remember there is a maximum lifetime allowance for tax relief contributions of £1.25 million, over which you will be required to pay additional taxes.
SEIS Investment Relief Schemes
From a purely tax perspective, the SEIS, Seed Enterprise Investment Scheme is simply the best vehicle to get tax relief in a single year. With a maximum investment allowable of £100,000 per year, you are eligible for a £50,000 tax relief. With the ability to carry back this tax relief to the previous year it provides a dual weapon to offset particularly successful years for high net worth individuals.
However, the SEIS eligibility rules are quite stringent, requiring the company to be a recent start up, you must not be an employee in the company, your stake can be no more than 30% of the company and the company itself must not have more than 25 employees or gross assets more than £200,000. You must also pay for the shares in cash in full upon investment to realize the income tax relief. You can claim your money back after 4 full months of trading and you can also claim the tax relief up to 5 years after your initial investment.
Finding a quality EIS/SEIS fund company that can help you choose the best investments, or mitigate your risks by investing in several companies is generally better than investing the full amount in 2 or 3 companies.
EIS Investment Relief Schemes
If you are looking for a higher total amount of tax relief to offset a very large income, the only real option is investing into an EIS. The Enterprise Investment Scheme allows a total annual tax relief of 30% of the aggregate invested value to a limit of £1 million. The EIS tax relief, similar to the SEIS can be applied to previous tax year and forward to any of the next 5 years from the time the shares were purchased. Also to receive the total tax relief your tax liability must be able to absorb the total amount.
Understanding the best way to allocate your tax relief over the life of their allowable years should be decided with a professional financial planner or tax expert. Ensuring the viability of your investments in an EIS can be best done generally with an EIS fund company that can provide professional services and advice across multiple potential investments.
If you are a looking for serious tax liability mitigation, the only true options include Pension contribution, SEIS and EIS investment relief.
Ten Income Tax Relief Takeaways
- You could lose as much as 45% of your income to taxes.
- Reduce your taxable income through a Payroll Giving scheme up to 25% of your income.
- Take every possible tax relief incentive, including Maintenance and Charitable donations.
- Take a maximum pension relief by contributing the maximum allowable amount every year.
- Do not go over your Pension’s lifetime limit or face paying a tax penalty.
- Your maximum annual Pension tax relief amount is currently capped at £40,000 or 100% of your income, whichever is lower.
- SEIS/EIS must be recognized by HMRC to qualify for tax relief, do not be blindsided by investing without an EIS3 form supplied by the company.
- SEIS’ provide a maximum of £50,000 income tax relief in a given year.
- EIS’ provide up to £1 million of income tax relief in a given year.
- If you are connected to a company of which you have invested in an EIS or SEIS your investment will not qualify for tax relief.
Please note that this is guidance only. Kuber Ventures is not a tax advisor and you are encouraged to seek your own Tax advice.