This article looks at tax reliefs arising from tax-efficient investments and how to claim them.
Personal pensions, stakeholder pension plans
Contributions to personal pension plans are allowable up to 100% of salary or taxable earnings, restricted to a general limit of £40,000 (for 2016/17) (if there are no earnings, the maximum contribution is £3,600 per annum). If earnings are over £150,000, the limit is reduced by tapering to £10,000 (if earning over £210,000).
Everyone receives the HMRC uplift of 20% on their contribution (whether a taxpayer or not). Higher rate taxpayers may also claim another 20%, and additional rate taxpayers another 25%, from HMRC.
- The product provider claims 20% basic rate tax relief from HMRC and adds it to your pension pot.
- Higher and additional rate taxpayers claim the additional 20% or 25% though their self-assessment tax return; or HMRC may adjust their tax codes to give additional relief.
Workplace pension schemes
- If the employer deducts contributions from pay before deducting tax from pay – you receive tax relief at the highest rate at source.
- If the employer takes contributions from your net pay after tax deducted – the pension provider claims back basic rate tax at 20% and adds this to your pot. You claim 20% or 25% if a higher or additional rate taxpayer through self-assessment or adjusted tax code.
- Third party (not employer) contributions – the pension provider claims 20% from HMRC to add to your pot, and you can still claim 20% or 25% if a higher or additional rate taxpayer.
- You pay someone else’s contribution (e.g. spouse, child example) – the pension provider claims 20%; the scheme member can claim higher rate tax relief; you claim nothing.
Individual savings accounts
Contributions are not tax deductible. Growth is tax-free.
Enterprise investment scheme (EIS) and seed EIS
Income tax relief can be claimed at 30% of the investment made up to £1 million per annum for EIS and 50% up to £100,000 for seed EIS investments.
You must have a tax bill to relieve, although this can apply to the previous tax year if elected.
- Share loss relief potentially applies if shares disposed of at a loss – (see HMRC’s Venture Capital Schemes manual at VCM10010).
- Capital gains tax (CGT) relief at 50% of the investment made (seed EIS); CGT exemption on gains apply; CGT deferral relief if the gain is invested in an EIS qualifying company.
- Relief can only be claimed once the company invested in issues you with an EIS3 or SEIS3 certificate. This will usually be after four months of trading. If invested via a fund manager, an EIS5 or SEIS5 certificate is issued. See HMRC Guidance HS341 ‘Enterprise Investment Scheme – Income tax relief (2015)’ for further information.
- Relief is claimed through self-assessment under ‘other tax reliefs’ (page Ai 2 section 2 for EIS and section 10 for SEIS).
Venture capital trusts
Income tax relief is available at 30% of the investment made up to £200,000 per annum.
- You must have a tax bill to relieve.
- Relief is claimed through self-assessment under ‘other tax reliefs’ (page Ai 2 section 1 for venture capital trust investments.
Community investment tax relief
Income tax relief for investing into accredited community finance institutions (CDFI’s) at 5% of the investment per annum for five years (25% in total). You must have a tax relief certificate. See HMRC Help sheet 237 for further information.
Relief is claimed through self-assessment under ‘other tax reliefs’ (page Ai 2 section 3 for community investments).
Social investment tax relief
Qualifying social investment tax relief investments into social enterprises or charities can give: a 30% income tax reduction for that tax year; capital gain deferral if you reinvest the profits into a social enterprise; and no CGT after three years if the investments are sold or given away. There is a £1 million investment limit.
Relief is claimed through self-assessment under ‘other tax reliefs’ (page Ai 2 section 11 for Social Investments).
Business premises renovation allowance
A capital allowance of up to 100% may be claimed as qualifying expenditure against income (see HMRC’s Capital Allowances manual at CA45500) and is claimed under self-assessment.
Practical Tip:
Many reliefs remain unclaimed, especially pension tax reliefs for higher rate taxpayers. Ensure that you qualify for tax reliefs and then claim them. Seek professional advice from a financial adviser where appropriate.
