Compact Services

The main tax incentives for investment are:

• income tax deduction for amounts invested - the rebate is either at a fixed 20%/40% or at the taxpayer's marginal rate of tax (DED'N)
• tax exemption on the income from the source (EXINC)
• tax exemption on gains arising (EXGAIN)
• the ability to defer capital gains on other disposals until the new investment is sold (DEFER)

Note that no investment can recover tax credits on dividends received after 5/4/04.

The main types of tax-advantaged investments are:

ISA (individual savings account)

Contributions made to one 'Maxi-ISA' (max. £7,000 each year) or to separate 'Mini-ISAs' (max. £3,000 in the 'cash component', £3,000 in the 'share component', £1,000 in the 'life assurance component'). No restrictions on withdrawal. No relief for losses.

PEP (personal equity plan)

No new contributions can be made to PEPs after 5/4/99, but existing PEPs can continue with their tax advantages. No restriction on withdrawals, but money withdrawn cannot be reintroduced. No relief for losses.

VCT (venture capital trust)

Relief is for subscription for new share capital in approved VCT - a quoted company which invests in small, unquoted trading companies. The income tax relief becomes permanent if the shares are held for 3 years, but gains (if any) are exempt immediately. No relief for losses. Deduction relief at 20% and deferral of gains on investments up to 2003/04.

EIS (enterprise investment scheme)

Relief is for subscription for new share capital in small, unquoted trading companies. The income tax relief becomes permanent, and gains are exempt, if the shares are held for 3 years. Further relief available for losses on disposal. Maximum investment £200,000 per tax year.

PPP (personal/stakeholder pension plan)

Contributions to approved PPPs are paid net of basic rate tax. The policyholder pays 78% of the premium and the Revenue pay 22%. Higher rate relief is given where due by increasing the basic rate band in the tax computation.

While the money is held within the pension fund, it is exempt from taxes on income and gains. When the policyholder takes the benefits under the scheme, 25% of the accumulated fund can be drawn as a tax-free lump sum, and the balance must be used to buy an annuity, which is taxable income.

Older pension policies (commenced before August 1988) are 'retirement annuity plans' and are subject to different rules on contributions (paid gross and deducted from income for marginal tax relief) and benefits (lump sum varies depending on the amount of the annuity which could be purchased).

These pension policies are subject to maximum annual contributions. Almost anyone can contribute £3,600 gross (£2,808 net) to a stakeholder pension scheme. Those with 'net relevant earnings' (business profits or salary from a job without an employer pension scheme) can make higher gross contributions based on NRE. The highest figure of NRE in this year or the last five can be chosen to justify this year's PPP contributions. RAPs are based on current NRE.

Major changes will be made to the tax treatment of pensions schemes from 6 April 2006, although smaller investors will be less affected.