The obvious route is to use pensions. You can put up to £40,000 in the current year into pensions and get tax relief at your highest marginal rate. You can also go back to the previous 3 years and add to that any unused relief in these years and add that to what you can get relief on in the current tax year.
Relief for the previous year tax years were 2015/16 £80,000, 2014/15 £40,000 and 2013/14 £50,000. However you need to have had a pension scheme available in those years. So if you have not paid any pensions premiums in those years you could now pay up to £210,000 assuming you have income up to that amount in 2016/17. If you are trading through a limited company the earnings limit would not apply if the company paid the premiums but the annual allowance amounts would. Beware that income over £150,000 your annual allowance of £40,000 reduces by £1 for every £2 over £150,000 until you reach £10,000
This can be a very useful strategy if you are losing some or all of your personal allowance because your income for 2016/17 is going to be over £100,000 as you lose £1 of your personal allowance for every £2 your income exceeds £100,000 resulting in marginal income tax rate of 60%.
You could of course invest in Enterprise Investment Schemes, EIS or Venture Capital Trusts, VCTs. These reduce your tax payable but not crucially your taxable income so they do not help to reinstate your lost personal allowance. These investments are usually of higher risk so you could lose money from the investment. One group who issues these provides loss insurance as part of the purchase price. Their investments are businesses that carry a certain amount of risk but they are at the lower end and may be more suitable.
The tax relief is 30% and is given by reducing the amount of tax you have to pay. You must stay invested in an EIS for at least 3 years and for at least 5 years for a VCT.
Alan Solomons BSc FCA CeFA DipPFA is a director of Alpha Investments and Financial Planning Ltd and one of only about 300 Independent Financial Advisers in the UK who is also a practising Chartered Accountant and is regularly quoted in the IFA press including FTAdviser, Money Management, Money Marketing etc. and can be contacted on 020 3397 7730, 079 6764 4743 or alan@alpha4u.co.uk
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