Compact Services

  2009 Budget - Investment Reliefs

The main tax incentives for investment are:

  • income tax deduction for amounts invested - the rebate is either at a fixed 20%/30% or at the taxpayer's marginal rate of tax (given by deduction from income - DED'N in tables below)
  • tax exemption on the income from the source (EXINC)
  • tax exemption on gains arising (EXGAIN)
  • the ability to defer capital gains on other disposals until the new investment is sold (DEFER)

The main types of tax-advantaged investments are:

ISA (individual savings account)

No Yes Yes No

Investment can be made in 'cash ISA' (up to £3,600pa) and/or 'stocks and shares ISA' (£7,200pa less amount invested in cash). No restrictions on withdrawal. No relief for losses. The investment limit rises on 6 October 2009 to £10,200 for people aged 50 or over and will rise to the same level for younger investors in 2010/11.

VCT (venture capital trust)

30% Yes Yes Not since 5/4/04

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, but gains (if any) are exempt immediately even for second-hand shares. No relief for losses. Maximum investment £200,000 pa.

EIS (enterprise investment scheme)

20% No Yes Yes

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. Further relief available for losses on disposal. Maximum investment £500,000 per tax year for DED'N; only limit for DEFER is size of qualifying company.

PPP (personal/stakeholder pension plan)

Marginal Yes Yes No

The details of the contract with the pension company may vary, but they must be within the basic framework set down by tax law.

PPP premiums are paid net of basic rate tax. The policyholder pays 80% and the Revenue pay 20%. Higher rate relief is given where due by increasing the basic rate band in the tax computation, resulting in reduced self-assessment payments or in increased PAYE code for employees.

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

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

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 £245,000 (in 2009/10).

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) are measured against a "lifetime allowance" (£1.75m in 2009/10). If the lifetime allowance is exceeded, there is a clawback charge on the excess.

Employers can contribute up to £245,000 to employees' pension funds, less any contributions made by the individual. The employer can enjoy tax relief on the cost under the normal rules for trading expenses. Large extra contributions by high earners after 22 April 2009 may be subject to a restriction of relief.

If a policyholder dies before taking any benefit under the scheme, the fund usually passes to dependants free of IHT. If death is during payment of benefits and a capital fund is payable to dependants, it is likely to be subject to IHT.