Mr I.C. Asks:
As a higher rate tax payer I would be interested to know what I can do legally to reduce the amount of tax that I pay. Are there any suggestions you could make?
Peter Sharratt Answers:
The obvious starting point is Pensions as they benefit from Tax Relief. Basic Rate Relief at 20% is given at the point you make the actual investment and as a Higher Rate Tax Payer you can claim an additional 20% by completing a Self Assessment Tax Form. You will have an Individual Savings Account (ISA) allowance of £10,680 for this Tax Year (assuming you have not used it already). This could be allocated 100% to a Stocks & Shares ISA and any growth will be free of Capital Gains Tax and any Income generated (Dividend/Interest) will also be free of Personal Tax.
If you are risk averse you could allocate up to £5,340 of the £10,680 to a Cash ISA and any Interest would then be paid Tax Free. If you have more than £10,680 to invest you could allocate the additional amount to Investment/s which would be subject to Capital Gains Tax (CGT). In future you could then use your annual CGT Allowance (currently £10,600) and realise a gain of this amount and pay no Tax. Other more specialist investments to consider are Venture Capital Trusts (VCTS) which qualify for Income Tax Relief at 30%. They are also exempt from CGT and any dividends paid to you are Tax Free. To retain the Tax benefits though the VCT must be held for at least 5 years. Enterprise Investment Schemes (EIS’s) also qualify for Tax Relief at 30% and if you have made a Taxable Capital Gain on other investments this can deferred by investing in an EIS. Any growth is Tax Free. An additional Tax Benefit if the EIS is that it is also Inheritance Tax Exempt after 2 years. To retain the Tax benefits the EIS must be held for at least 3 years. The above summarises some options, all have contribution limits and of course varying degrees of Risk. You should get further advice, especially if you are considering VCT’s or EIS’s as these are complex, higher risk financial products which can be difficult to sell/realise the capital from in future.
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Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.