My Income Tax Bill Is Ridiculously High, Help!Written on January 7, 2016 by Kirk Rice LLP
Taxing Times QuestionsThe Question:
My accountant says I’ve a tax charge for exceeding the annual pension contribution limit. I am an experienced investor and he suggested I look at an EIS. How would that help?
Kirk Rice LLP answers:
I’ll share the reason why you have an unusually large tax bill. Your employer has paid large pension contributions for the last 4 years and taken together with your own payments, the total has exceeded your cumulative annual allowances. This means you now repay some of your tax relief through self-assessment. You chose not to pay the tax from your pension plan as you want to ensure maximum tax efficiency within the plan. Many more people will find themselves in your situation after April 2016 as the government has made several changes to reduce the cost of tax relief on pension contributions.
You asked specifically about an EIS. Some new companies looking for investment may meet the criteria of the Enterprise Investment Scheme (EIS) which means each person who buys shares can benefit from very attractive tax incentives. There is no Capital Gains Tax on any profit you make subject to holding the investment for at least 3 years. Income tax relief is available of up to 30% of the amount invested. If the company loses its qualifying status the CGT exemption will be lost. Loss relief is available too in addition to the income tax relief received. In reality, I suggest you should expect to be invested for much longer than 3 years. As the investments are in small companies the shares will be generally liquid, which means you will not be able to sell them at any time, unlike you can if you hold a share like Vodafone. The risk of failure and loss of your money is extremely high which is why the government introduced the tax incentives to encourage investment. As regular readers know we seek to reduce risks, and to do this within small EIS qualifying companies we will select specialist investment managers. They provide each investor with a diversified portfolio of eligible companies which is then closely managed. This means that if a company loses its EIS status another alternative can be introduced maintaining your tax benefits.
In summary an EIS enables you to invest using money you will otherwise pay as income tax and benefit from tax free growth on it. By using a specialist portfolio manager, you will reduce the risk of a total loss which would be present if you only invested in a single new company. A specialist portfolio manager may have experiences to show how they managed previous events affecting the tax incentives.
Would you like to learn more? Read about our investment services.
If you would like more advice regarding this issue or any other financial services matter, please contact us.
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The value of investments and income, if any, may go down and you may not get back the original amount invested. Investment in smaller companies should be considered higher risk than is customarily associated with funds investing in larger, more established companies. Sudden above average price movements and valuations can be expected.
Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.
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