Reductions in pension tax relief drives 9% increase in just 1 year
Recent research by UHY Hacker Young (June 2018) has revealed that individuals earning £150k+, also known as higher rate taxpayers, paid £54.3bn income tax in the last tax year, up from £50bn in 2016/17. There has been speculation for some time that the cutting of pensions tax allowances would impact on higher rate taxpayers This is because these allowances define the maximum amount that can be contributed to a pension that benefits from tax relief. The tipping point appears to have been the introduction of a tapered annual allowance in the 2016/17 tax year.
Source: Taxation.co.uk
Since 2016, the Annual Allowance has been tapered so that for every £2 of adjusted income earned above £150k, the Annual Allowance is reduced by £1. As a result, the Annual Allowance could be reduced from £40k to £10k in some cases.
While the lifetime allowance is set to increase by CPI, there is talk of the annual allowance being reduced further in the Autumn 2018 budget. This would likely generate another sharp jump in income tax from higher rate taxpayers who previously used the reliefs to reduce their income tax liabilities.
According to UHY Hacker Young partner, Clive Gawthorpe: “Higher earners have been hit hard by cuts to pension tax reliefs, which have been widely used as a tool to reduce income tax liabilities, and this combined with fiscal drag is proving a potent mix.”
Fiscal drag occurs when income tax brackets do not move with inflation, causing more individuals to fall into upper tax brackets and increasing overall tax payments. Ascot Lloyd research carried out this year and using CPI as the inflation measure found that while inflation has increased 26% since 2008, the higher-rate tax threshold has only risen 13.5% over the same period. As a result, nearly five million taxpayers have been pulled into paying the 40% or 45% tax rate that would not have been otherwise.
Consequently, high earners have become increasingly exposed to income tax. But there is a way to access the potential of high returns while supporting the UK economy and benefiting from generous tax reliefs – the Enterprise Investment Scheme (EIS). Investors are required to invest into small, early stage, UK companies, widely recognised as important contributors to the current and, more importantly, future UK economy.
While investing in companies of this nature is inherently high risk, there is potential for some to deliver high returns. The tax reliefs offer a cushion against the potential downside risks which include investee company failures. Portfolio diversification and expert selection of promising companies can also be valuable risk mitigators.
Not only do the reliefs include, after a three-year statutory holding period, 30% up-front income tax relief, but they also include CGT free growth, CGT deferral and loss relief that limits any potential losses for higher rate earners to 38.5p in the pound. This is without even mentioning Business Relief qualification, providing up to 100% IHT relief after the two-year holding period.
The Oxford Capital Ventures Team is experienced in identifying and supporting EIS qualifying companies and using them to build well-managed and diversified, tax-efficient portfolios for investors.
For more information about the tax efficiency available in EIS investing, click here.
Oxford Capital is not able to offer financial advice and this blog should not be construed as advice. Tax planning and EIS tax reliefs depend on individual circumstances and are subject to change.