Bonuses: how to avoid a tax haircut
Archived article
Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.
The bankers’ bonus cap is set to be scrapped next week – 31 October 2023.
This means that for the first time since 2014, when the cap was introduced, employees of banks, building societies, and certain investment management firms will be able to receive higher bonuses. But that could also mean a higher income tax bill.
What could experienced investors do to mitigate this potential tax bill?
If you’re an experienced investor comfortable with investment risk, tax-efficient investments could be an option to consider.
The government offers generous income tax relief for investing in dynamic young businesses – a driving force of the UK economy – via its Venture Capital Schemes: Venture Capital Trusts (VCTs), the Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS).
The tax breaks aim to temper some of the higher risks of investing in small young businesses, as opposed to their larger, more established counterparts. SEIS is the most generous, with up to 50% income tax relief, as it invests in the earliest-stage and therefore highest-risk companies.
Important: The information on this website is for experienced investors. It is not advice nor a research or personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. These investments are high risk and illiquid and can fall as well as rise in value: you could lose all the money you invest.
What tax reliefs might be available with VCTs, EIS and SEIS?
Besides mitigating income tax, some of these investments also offer relief against capital gains and inheritance tax liabilities – whilst offering tax-free growth.
In the case of EIS and SEIS, you could also have the option to ‘carry back’ income tax relief – in other words, apply the relief to last year’s income tax bill – potentially claiming back tax you’ve already paid, perhaps on last year’s bonus.
Tax benefits depend on circumstances and tax rules can change. This is a brief outline based on current rules: there are detailed conditions and rules you should consider carefully before investing. If unsure, seek advice. Decisions should be based on the investment merit, not the tax reliefs alone.
VCTs
- Up to 30% income tax relief
- Tax-free dividends
- You can invest up to £200k per tax year
- Tax relief available in the tax year you invest
- Must hold the investment for at least five years
EIS
- Up to 30% income tax relief – in same tax year, or 'carry back’ to reduce the previous year’s tax bill
- Capital gains tax deferral on gains made elsewhere
- Loss relief
- Inheritance tax relief (when held at least two years and upon death)
- You can invest up to £2 million (if including knowledge-intensive EIS) per tax year
- Must hold the investment for at least three years to retain tax relief - you should expect to hold the investment considerably longer
SEIS
- Up to 50% income tax relief – in same tax year, or 'carry back’ to reduce the previous year’s tax bill
- Up to 50% capital gains reinvestment relief on gains made elsewhere
- Loss relief
- Inheritance tax relief (when held at least two years and upon death)
- You can invest up to £200k per tax year
- Must hold the investment for at least three years to retain tax relief - you should expect to hold the investment considerably longer
Free guide: VCT, EIS and SEIS tax reliefs compared
For more information please read our simple guide – it gives an overview of the differences between VCTs, EIS and SEIS and how the tax reliefs compare.
If you have any questions on the guide or another investment matter, please get in touch.
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Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.