Compact Services

The main tax incentives for investment are:

• income tax deduction for amounts invested - the rebate is either at a fixed 30%/50% or at the taxpayer's marginal rate of tax (DED'N in tables below)


• tax exemption on the income from the source (EXINC)


• tax exemption on gains arising (EXGAIN)


• deferral of capital gains until the new asset is sold (DEFER)

ISA (individual savings account)

New rules apply from 01/07/2014: annual investment limit of £15,000 which can be in cash or stocks and shares (up from £11,880 before that). No restriction on withdrawal. No relief for losses. Junior ISA for under-18s has lower limits.

VCT (venture capital trust)

Deduction relief is for subscription for new share capital in approved VCT - a quoted company which invests in small, unquoted trading companies. The income tax relief becomes permanent if the shares are held for 5 years. Income and gains (if any) are exempt immediately even for second-hand shares. No relief for losses. Maximum investment £200,000 pa.

EIS (enterprise investment scheme)

Relief is for subscription for new share capital in small, unquoted trading companies. The income tax relief becomes permanent, and gains are exempt, if the shares are held for 3 years. Capital losses are eligible for further income tax relief. Maximum investment £1m per tax year for DED'N and EXGAIN; only limit for DEFER is size of qualifying company. Investments can be ‘carried back’ for relief in the previous tax year, subject to the overall annual limit. Several other conditions apply.

SEIS (seed enterprise investment scheme)

Similar to EIS, but limit is £100,000 and company must carry on a new small trade. If gains are made on other assets, investment in SEIS shares allows exemption of half the gain – effective relief at 9% or 14%.

PPP (personal/stakeholder pension plan)

Contributions to PPPs are paid net of basic rate tax. The policyholder pays 80% and HMRC pay 20%. Higher rate relief is given where due by increasing the basic rate band in the tax computation – more tax is paid at 20% and less at 40% or 45%. This relief can be given through the self-assessment system or by adjusting the PAYE code.

Tax relief is due on an individual’s gross contributions up to £3,600 (£2,880 net), or 100% of current year employed or self-employed earnings if higher, up to £40,000 (£50,000 pa up to 2013/14). If contributions have been below the limit in any of the preceding three years, the unused relief can justify a larger current payment.

While the money is held within the pension fund, it is exempt from taxes on income and gains, so it grows faster than investments held directly by an individual.

When a policyholder takes benefits under the scheme, up to 25% of the accumulated fund can be drawn as a tax-free lump sum. The balance is used to provide an income (which is taxable). The income can be a purchased annuity for life, or "income drawdown", in which the fund is still invested to produce income which can be paid to the pensioner.

The March 2014 Budget included the radical proposal, to take effect in April 2015, that investors in personal and other defined contribution pension schemes will no longer have to buy an annuity. Instead, they will be allowed to take any amount out of their fund when they want to, and will be taxed on it as income (apart from the initial 25% tax-free lump sum). The details will be announced later.

When a policyholder takes benefits, the capital value on which benefits are drawn (e.g. as a 25% tax-free lump sum plus an annuity based on the other 75% of the fund) is measured against a “lifetime allowance” (£1.25m in 2014/15). If the lifetime allowance is exceeded, there is a clawback charge on the excess. The limit was £1.5m in 2013/14: those adversely affected by the reduction in lifetime allowance can apply for "protection" to reduce the impact of the clawback.

Employers can contribute up to £40,000 per annum to an employee’s pension fund, less any contributions made by the individual. The employer can enjoy tax relief on the cost under the normal rules for trading expenses.

If a policyholder dies before taking any benefit under the scheme, the fund usually passes to dependants free of tax. If death occurs during payment of benefits and a capital fund is payable to dependants, it will be subject to 55% income tax charge.