Income tax takings are sharply up, and rising – but tax relief is available
HMRC’s income tax takings have been on a sharp upward trajectory since 2021/22, official figures show.
It collected a record £273.3 billion in 2023/24 – breaking the previous year’s high of £248.4 billion – and annual receipts are forecast to swell further over the next five years to £363.5 billion.
This is largely because high inflation since 2021 has raised wages, whereas tax thresholds continue to be frozen – pushing more earners into higher tax bands and resulting in a tax bonanza for the Treasury.
What could experienced investors do to mitigate a potentially higher income tax bill?
If you’re an experienced investor comfortable with investment risk, tax-efficient investments could be an option to consider.
The government offers up to 50% income tax relief for investing in dynamic young businesses and startups – a driving force of the UK economy – via its Venture Capital Schemes: Venture Capital Trusts (VCTs), Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) investments.
The tax breaks could help mitigate somewhat the higher risk of investing in small young businesses – as they are statistically more prone to failure than large, established companies.
Tax rules can change and benefits depend on circumstances. 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.
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. Tax rules can change and benefits depend on circumstances. Decisions should be based on investment merit, not tax reliefs alone. In recent months, there have been widely reported rumours that the next government might change IHT, after the election.
What tax reliefs are available with VCTs, EIS and SEIS?
All three schemes offer income tax relief of up to 30% (VCTs and EIS) and up to 50% (SEIS). In addition, some of these investments could provide relief against capital gains and inheritance tax, as well as loss relief – and all of them offer tax-free growth.
In the case of EIS and SEIS, you also have the option to ‘carry back’ the income tax relief to the previous tax year – in other words, apply the relief to last year’s income tax bill – to potentially claim back tax you’ve already paid.
Briefly, the key features and reliefs:
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
- You 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 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 per tax year (if including knowledge-intensive EIS)
- You 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 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
- You 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.