Tax freedom day – or is it?
Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.
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.
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.
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.
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.
If you invest now you can adjust your tax code for 2016-17 tax year and potentially pay less tax almost immediately.
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.
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.
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.
Wealth Club aims to make it easier for experienced investors to find information on – and apply for – tax-efficient investments. You should base your investment decision on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.