Tax freedom day – or is it?

Today is 'Tax Freedom Day' – the first day of the year when we theoretically stop working for the taxman and start working for ourselves. For the first time in 15 years it's in June, a clear sign our tax burden is getting heavier. This means that for the first 154 days of 2016 every penny the average person earned has been gobbled up by the government. 

Of course, there’s no such a thing as the average person. If you're a high earner chances are you’re not free yet – and you may not be for a while. 

According to the Adam Smith Institute, which calculates Tax Freedom Day, net national income has increased by £34.6 billion from last year. However, the Government has taken £35.4 billion more in taxes. So taxpayers are around £1 billion worse off. 

What’s more a disproportionate part of that burden is borne by high earners. The top 10% of taxpayers are projected to be liable for nearly two thirds of all tax, according to HMRC. 

How can you free yourself from tax a bit earlier?

There are ways to cut the tax you pay. Some are better known, such as pensions and ISAs, others less so, but increasing in popularity. 

I’m referring to Venture Capital Trusts (VCTs), Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), which last year alone raised a total of £2.3 billion. 

These government-endorsed schemes invest in small companies – the lifeblood of the economy. That’s riskier than investing in larger companies, and not for everyone, but offers generous tax breaks to help compensate for these risks.

You could cut your income tax bill by 30% (VCTs and EIS) or even 50% (SEIS). 

In addition, VCTs pay tax-free dividends – £240.3 million during the year to March 2015. EIS allows you to defer unlimited capital gains, potentially indefinitely and with SEIS you can completely wipe out half of a capital gains liability.  

Please remember though, tax benefits depend on circumstances and tax rules can change.  

Wealth Club - VCT, EIS and SEIS tax benefits comparison

Read more about VCT tax savings 

Read more about EIS tax savings

Read more about SEIS tax savings

If the idea of investing in small companies and saving tax appeals to you, you might want to have a look at the investments currently open. On this site you will find 51 different opportunities. We have fully reviewed 36 after conducting detailed interviews with the asset manager. 

View all reviews

Why act now

Every day you delay investing, more of your money remains in hands of the taxman. In addition, it is likely there maybe less opportunities around this year as the rules on what VCTs and EIS can invest have been tightened. 

VCTs

Below are links to two VCTs we particularly like which are closing on 30 June. If you invest now you can adjust your tax code for 2016-17 tax year and potentially pay less tax almost immediately.

Downing ONE

Maven Income and Growth 6

View all VCT offers

EIS 

We also highlight two EIS we like, Earthworm and CHF media.

With EIS you can claim the 30% income tax rebate against the current or previous tax year – you could save up to £600,000 income tax across the two years. You can also defer capital gains. Because last year CGT was 28% and is now 20% on the sale of most assets, by deferring a gain you could potentially save a significant amount in tax, although please remember tax rules can change.

Earthworm Environmental

CHF Media

View all EIS offers

SEIS 

You can claim the 50% income tax rebate against the current or previous tax year – you could save up to £100,000 income tax across the two years. By investing in SEIS you could also potentially wipe out 50% of capital gains.

Amplify Music 4

Goldfinch

View all SEIS offers

Remember: tax receipts are set to eat up 42.3% of the UK’s net national income. You have a choice though: accept that or act now to reduce the tax you pay.