Investing to reduce your tax liability

I frequently get asked what employees can do to reduce their tax liability. As an employee, your opportunities are less than as a self-employed individual but you still have some. Here are a couple of examples that can be used by anybody:

Pensions and Gift Aid donations

If you are a higher rate tax payer, you can increase your basic rate tax band by making either personal pension contributions or some Gift Aid donations. You can also do both. 

Pension contributions must be made from your net salary and not through your employer as a salary sacrifice or as an employer contribution. There are restrictions on the amount of money that you can put into a pension pot each year and this is based on your earned income. Do check out these limits, and using any unused allowances with a professional. 

Gift Aid donations need to be made to a registered charity and you need to elect to have these treated as a Gift Aid donation. That way, the charity is able to claim back the additional Gift Aid amount, as well as you potentially benefitting from a higher basic rate tax band.

Investing in another business 

There are various tax-incentivised investments that you can consider in order to reduce your tax liability in the year the investment is made. These types of investments are beneficial also at the time of exit, and this is whether the business should be liquidated or you sell your shares.

The main type of tax incentivised investments are:

• EIS: enterprise investment scheme

• SEIS: seed enterprise investment scheme

• VCT: venture capital trusts

Each of these opportunities comes with their own rewards and pitfalls, however, and we always recommend you speak to a professional before making any investments.

Next month

In my article next month, I will explain further how these schemes operate and how your tax bill can be affected by these schemes.

Grow your business

If you want to start a business, or grow an existing one, please join my Facebook group, which is there to help you with tips and advice. Search for: Growing Businesses – Tips, Help & Advice.

We are happy to answer questions in future issues. Please send them through the Contact Us page on our website.

Chantal Baker, is the director and founder of Champ Consultants Ltd, an accountancy and tax consultancy practice in Caterham. Please follow us on our various social media channels.

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