There are certain tax efficient investments that are available should you wish to invest your personal savings. Due to their complexity we consider Individual Savings Accounts (ISAs) and Tax Relief on Pensions separately.
This information provides general tax advice only and should not be used in isolation. You should always seek investment advice from qualified individuals before entering into any investment options.
National Savings & Investments
National Savings & Investments are considered to be a “safe” way of saving and investing money because the Treasury backs it. Tax-free savings and investment products from National Savings & Investments currently include:
- Income bonds- for savers looking at a monthly income at a variable rate
- Children’s Bonds - can be invested for five years on behalf of children aged under 16
National Savings & Investments also issue Premium Bonds. If you buy Premium Bonds, you won't earn interest, but you can win tax-free prizes.
Enterprise Investment Scheme (EIS)
There are potential tax advantages for individuals who invest in shares in a qualifying EIS company. These are generally new companies seeking finance and may be viewed as high-risk investments.
You will be entitled to Income Tax relief that takes the form of a reduction in your income tax liability. The reduction is equal to 30% on the amount of the subscription. The relief can only reduce the liability to £nil and cannot generate a tax repayment.
The maximum you are able to invest into an EIS company and receive Income Tax relief and capital gains tax exemption on in the 2016/2017 tax-year is £1,000,000, giving a maximum reduction in any one year of £300,000, providing you have sufficient income tax liability to cover it. The shares must be held for a certain period or Income Tax relief will be withdrawn. Generally, this is 3 years from the date the shares were issued. But if the qualifying trade started after the shares were issued, the period is 3 years from the date the trade actually started. Income Tax relief can only be claimed by individuals who are not ‘connected’ with the company.
The shares must have been held for three years to qualify for the capital gains tax exemption. Any shares disposed at a loss (after deduction for income tax relief given) can be set against income of the year in which they were disposed of, or any income of the previous year, instead of being offset against any capital gains.
Certain capital gains tax deferral relief is also available where gains can be deferred if invested in an EIS qualifying company.
Seed Enterprise Investment Scheme (SEIS)
The SEIS complements the existing Enterprise Investment Scheme (EIS) which offers tax reliefs to investors in higher-risk small companies.
It is similar to the EIS scheme in that you are entitled to Income Tax relief that takes the form of a reduction in your income tax liability. However, the reduction is equal to 50% of the cost the amount of the subscription, on a maximum annual investment of £100,000 –the SEIS is intended to recognise the particular difficulties which very early stage companies face in attracting investment, by offering tax relief at a higher rate.
The shares must be held for a period of 3 years, from date of issue, for relief to be retained. If they are disposed of within that 3-year period, or if any of the qualifying conditions cease to be met during that period, relief will be withdrawn or reduced.
If you have received income tax relief on the cost of the shares, and the shares are sold after they have been held for at least 3 years, any profit is free from Capital Gains Tax.
If no claim to income tax relief is made, then any other sale of the shares will not qualify for exemption from Capital Gains Tax.
Capital gains reinvestment relief is limited to 50% of qualifying SEIS expenditure.
Social Investment Tax Relief (SITR)
Social investment relief is available to individual investors who invest in qualifying social enterprises i.e. unquoted community interest companies, community benefit societies or charities with fewer than 500 full-time employees.
If you make an eligible investment, you can deduct 30% of the cost of their investment from your income tax liability. The investment must be held for a minimum period of 3 years for the relief to be retained.
If you have chargeable gains in that tax year, you can also defer your capital gains tax (CGT) liability if you invest your gain in a qualifying social investment. Tax will instead be payable when the social investment is sold or redeemed. You also pay no CGT on any gain on the investment itself, but they must pay income tax in the normal way on any dividends or interest on the investment.
Non-qualifying life insurance policies (often referred to as single premium investment bonds) provide a tax-free wrapper for higher rate taxpayers to enable an investment to grow free of Higher Rate Tax until such time as it matures or is encashed.
You are able to take out up to 5% of the investment each year without incurring a tax charge. Any withdrawals in excess of the 5% limit will be taxable but only if you are a Higher Rate Tax payer in the year in which the “gain” is made. The 5% limit is cumulative so you can, for example, draw 25% of the fund after 5 years of not making withdrawals.
Tax will arise on the encashment of the bond, but only to the extent that you are a Higher Rate Tax payer during the year in which the bond is encashed.
You can therefore make tax savings by planning the date of encashment or maturity to a tax year in which you are not a Higher Rate Tax payer.
Tax-free interest on bank and building society accounts
From 6 April 2016, most people can earn some income from their savings without paying tax.
This is called a Personal Savings Allowance. It applies to each tax year, from 6 April to 5 April the following year.
If your total taxable income is £17,000 or less you won’t pay any tax on your savings income. Otherwise your allowance depends on which income tax band you are in.
Income Tax band
Tax-free savings income
You’ll pay tax on any income above this at your usual rate of income tax.
Savings covered by the allowance
The allowance applies to interest from:
- Bank and building society accounts
- Savings and credit union accounts
- Unit trusts, investment trusts and open-ended investment companies
- Peer-to-peer lending
The allowance also applies to income from:
- Government or company bonds
- Life annuity payments
- Some life insurance contracts
Savings already in tax-free accounts like individual savings accounts (ISAs) and some National Savings Accounts don’t count towards the allowance.