Here are some tax tips if you earn over 100K.
Your personal allowance is reduced by £1 for every £2 your income is over the £100,000 limit and your marginal rate of tax could be 60%.
If your income exceeds £125,140 (2024/25 tax year) then you will lose your entire allowance. As a consequence the marginal rate of tax for someone with income between £100,000 and £125,140 will be 60% (tax at 40% on income over £100,000 up to £125,000 PLUS tax at 40% on the loss of personal allowance up to £12,570)
One of the ways of to minimise exposure to these marginal tax rate is by increasing your pension contributions – for example if your income is £110,000 you could make a pension contribution of £10,000. You’ll receive 40% tax relief on the contribution and your full personal allowance will be reinstated.
However, the annual pension allowance is currently £60,000 (2024/25 tax year) and is made up of all contributions to your pension made by you, your employer and any third party (including pension tax relief).
OK, so what else do I need to know and consider?
You might wish to consider tax-efficient ways to invest your money if you have high income or capital gains.
Compared with pension and traditional ISAs, Venture Capital Trusts(VCTs), Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme(SEIS) come with generous tax relief allowances. These are all government backed by the government to encourage investment in young and dynamic British enterprise.
Your capital is at risk when using any of these schemes to invest and is recommended to talk to a professional financial adviser before making any investment decision.
What are the features of these schemes?
Venture Capital Trusts (VCTs) – are investment companies that are listed on the London Stock Exchange and set up to invest in small UK businesses that meet certain criteria. you can invest up to£200,000 per tax year.
You acquire the shares in the trust and not the companies;
Risk is diversified;
Income tax relief of up to 30%: a £10,000 investment could provide a £3,000 saving on that year’s income tax bill, as long as the amount of income tax you claim does not exceed the amount of income tax due. You could invest up to £200,000 this tax year and receive an income tax rebate of up to £60,000;
You must hold the shares for at least five years;
Tax free dividends;
Tax free growth;
Enterprise Investment Scheme - you can invest up to £2 million per tax year
You acquire the shares in the actual companies
Less diversification
Income Tax relief : Income tax relief of up to 30%: a£10,000 investment could provide a £3,000 saving on that year’s income tax bill. To claim this, you must have sufficient income tax liability
You must hold the shares for at least three years.
Carry back - you can elect for your EIS shares acquired in one tax year to be treated as though they had been acquired in the previous tax year. This in effect lets you apply the relief to a previous year’s tax bill, provided you have unused EIS allowance for that year. This way, you could claim back tax you’ve already paid;
Loss relief – if you make a loss on the investment this less any income tax relief received can be offset against your income tax bill;
Tax free growth – usually don’t pay Capital Gains Tax (CGT) if you claimed tax relief and the company still qualify.
2. Seed Enterprise Investment Scheme – you can invest up to £100,000 per tax year
Higher risk as companies you are investing are newer ( less than two years old)
Income tax relief of up to 50%: a £10,000 investment could provide a £5,000 saving on that year’s income tax bill. As with EIS, you must have sufficient income tax liability and hold the shares for at least three years.
Carry back – can make the same election as per EIS and claim back any
tax you already paid
Tax-free profits: you pay no capital gains tax (CGT) when selling SEIS shares, if you have held them for at least three years, claimed income tax relief on them and the companies are still SEIS-qualifying.
50% capital gains reinvestment relief: this is a particular feature of SEIS, differing from EIS. If you invest capital gains made on assets elsewhere into a qualifying SEIS company, you can reduce the CGT on the gain by up to 50%, provided you also get SEIS income tax relief;
Loss relief – can be applied in the same way as EIS
How do you claim the S/EIS tax reliefs?
You can claim relief via your tax return and you will need a S/EIS3 or S/EIS5 form from the S/EIS company (or fund manager). You should receive this after your money has been invested, your shares allotted and the S/EIS company receives confirmation from HMRC it has satisfied all the requirements.
If you have already filed your tax return and you received your S/EIS3 certificate(s) you can still make a claim in the following tax year. A claim for EIS tax relief can be submitted up to 5 years after the 31 January following the tax year in which the shares were issued.
If you would like to discuss it further, contact us here 0333 050 5658 or at hello@visionaccountants.co.uk
