6.5 million to pay higher income tax – what are the options for experienced investors?
The numbers are out – 6.5 million people are expected to be dragged into the higher (40%) and additional (45%) rate of income tax this year, according to HMRC's latest estimates published on 29 June.
Inflation-boosted pay awards combined with Chancellor Jeremy Hunt's decision to freeze the income tax personal allowance and thresholds until 2028 are to blame. Current arrangements could mean an additional £30 billion in revenue for the government yearly, a significant increase from the £8 billion expected in 2021 when a freeze was first introduced.
If you are an experienced investor, how might you cut your tax bill – whilst supporting small young British businesses? What steps could you take today?
Here we look at what the new rules are and what you could do to mitigate the impact.
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. There are limits to the amount which can be invested into some of these investments each tax year and minimum holding periods to retain tax reliefs may apply. Decisions should be based on the investment merit, not the tax reliefs alone.
Why are income tax bills going up?
In the past, income tax thresholds have risen in line with inflation.
In 2021, then-Chancellor Rishi Sunak froze the salary at which people start paying income tax at £12,570 and the higher rate at £50,270. In November, the freeze was extended until 2028.
Moreover, from this tax year, the threshold at which you start paying the top rate (45%) of income tax has dropped from £150,000 to £125,140. More taxpayers will be caught. Meanwhile, existing top-rate taxpayers will see an average increase of £1,200 on their income tax bill.
How to reduce your income tax bill – up to 50% income tax relief
Pensions have historically been the go-to investment to reduce one’s income tax bill. Successive restrictions over the last 13 years mean this is no longer an option for many. For high earners, the allowances can be much less generous.
An increasingly popular alternative is to invest in British startups through VCTs, EIS and SEIS. To mitigate the high risks involved, the government offers valuable tax reliefs:
- VCTs: save up to 30% on this year’s income tax bill. You can invest up to £200k per tax year. Read more and see current VCT offers »
- EIS: save up to 30% on this year’s income tax bill and/or potentially get back tax you’ve already paid last tax year. You can invest up to £2 million (if including knowledge-intensive EIS) per tax year. Read more and see current EIS offers »
- SEIS: save up to 50% on this year’s income tax bill and/or potentially get back tax you’ve already paid last tax year. You can invest up to £200k per tax year. Read more and see current SEIS offers »
1. Invest in a VCT – up to 30% income tax relief and tax-free dividends
Any dividends paid out from VCTs are tax-free – so don't use up your dividend allowance, which has now been halved.
The sooner in the tax year you invest in a VCT, the sooner you can start benefitting from any dividends it may pay. Note, VCT dividends are variable and not guaranteed.
In addition, when you invest in a VCT you may claim up to 30% income tax relief. If you invest at the start of the tax year, you could ask HMRC to change your tax code. So, instead of having to claim the tax relief after paying the tax, you could have your income tax reduced each month under PAYE.
Octopus Apollo VCT
Wealth Club investors will save 3.5% (4.5% for existing investors) on the initial charge, plus receive 0.10% annual rebate for three years. The deadline for next allotment is 18 October 2023.
Wealth Club investors will save 3% on the initial charge, plus 0.10% annual rebate for three years. The extended deadline for final close is 28 Jul 2023 (1pm).
Please note, all VCT offers could closer sooner than the planned deadlines if capacity is reached. See all current offers with the latest capacity figures (as provided by the manager), read our review and apply online.
2. Invest in EIS – save up to 30% income tax this tax year or the last, plus defer capital gains made elsewhere
When you invest in EIS, you can offset up to 30% income tax relief against your current year’s tax bill – or the previous year’s if you use carry back. Furthermore, any growth is tax free and the investment should be IHT free after two years. You may also defer tax on capital gains made elsewhere, for as long as that gain is invested in an EIS-qualifying investment. If things don’t work out as planned, you can use loss relief to offset losses against income.
Fuel Ventures Scale-up EIS Fund
The fund seeks to make investments into early-stage digital businesses operating in three key areas: marketplaces, platforms, software as a service. The fund is managed by successful entrepreneur-turned-investor Mark Pearson, founder of MyVoucherCodes.co.uk, which he built from the ground to a reported £55 million sale. The Fund aims to deploy investor capital within 12 months – not guaranteed. The next deadline is on 29 September 2023.
The Guinness EIS fund looks to offer scale-up capital targeting businesses that are already generating revenue, preferably £1 million or above, with evidence of durable revenue streams. The next tranche for planned allotment in 2023/24 is on 29 September 2023, not guaranteed.
Octopus Ventures EIS Service
Managed by Octopus Ventures – one of the largest venture capital teams in Europe – the service invests in some of the UK’s fastest-growing private technology companies across fintech, health, deep tech, consumer and B2B software. It usually co-invest with its well known stablemate Octopus Titan VCT, the UK’s largest VCT. The fund aims to deploy investor capital within 6-12 months – not guaranteed. The next deadline is 21 July 2023.
Parkwalk Opportunities EIS Fund
The fund is managed by Parkwalk Advisors, one of the UK’s most active investors in university spinouts with more than £400 million assets under management. The Fund looks to back patented technology with commercial potential from UK universities. Parkwalk also manages funds in conjunction with the technology transfer departments of the universities of Cambridge, Oxford and Bristol, as well as Imperial College. The Fund aims to deploy investor capital within 12-18 months – not guaranteed.
University of Oxford Innovation Fund VI
Launched in 2014, the University of Oxford Innovation Fund offers Oxford alumni and investors opportunities to invest in early-stage science and technology companies, usually as they spin out of Oxford University. The deadline is 18 Aug 2023.
3. Invest in SEIS – save up to 50% income tax and capital gains tax
The most generous tax reliefs are reserved for investing in the youngest – and therefore highest-risk – companies, under SEIS. These include up to 50% income tax relief, with the option to carry back to the previous year, and up to 50% capital gains tax relief. As with EIS, any growth is tax free, the investment should also be IHT-free after two years and you could claim loss relief if things don’t go to plan.
Two of our featured SEIS have imminent deadlines for allotment this tax year – you can read more and apply online.
Fuel Ventures SEIS Fund
Fuel Ventures SEIS Fund aims to provide seed funding to very early-stage or startup (and so very high-risk) digital businesses and use Fuel's first-hand operational experience to mentor and accelerate their growth. The next deadline is 28 July.
Startup Funding Club SEIS Fund
The Startup Funding Club SEIS fund does what the name suggests: it invests in UK startups, alongside its network of business angels. The next deadline is 30 June for targeted deployment by end of October 2023 – not guaranteed. The next deadline is 28 July.
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.