Compact Services

The main tax incentives for investment are:

• income tax deduction for amounts invested - the rebate is either at a fixed 30%/50% or at the taxpayer's marginal rate of tax (DED'N in tables below)
• tax exemption on the income from the source (EXINC)
• tax exemption on gains arising (EXGAIN)
• deferral of capital gains until the new asset is sold (DEFER)

ISA (individual savings account)

Investment can be made in 'cash ISA' (up to £5,760pa) and/or 'stocks and shares ISA' (£11,520pa less amount invested in cash). No restrictions on withdrawal. No relief for losses. A ‘Junior ISA’ can be opened for someone under the age of 18 with an annual limit of £3,720.

VCT (venture capital trust)

Deduction 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 5 years. Income and gains (if any) are exempt immediately even for second-hand shares. No relief for losses. Maximum investment £200,000 pa.

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. Capital losses are eligible for further income tax relief. Maximum investment £1m per tax year for DED'N and EXGAIN; only limit for DEFER is size of qualifying company. Investments can be ‘carried back’ for relief in the previous tax year, subject to the overall annual limit. Several other conditions apply.

SEIS (seed enterprise investment scheme)

New relief in 2012/13: similar to EIS, but limit is £100,000 and company must carry on a new small trade. Gains realised in 2012/13 and invested in SEIS in 2012/13 (including carry-back from 2013/14) will be exempt from CGT if shares held 3 years. 50% exemption for 2013/14 gains reinvested in SEIS.

PPP (personal/stakeholder pension plan)

The details of the contract with the pension company may vary, but they must be within the basic framework set down by tax law.

PPP premiums are paid net of basic rate tax. The policyholder pays 80% and HMRC pay 20%. Higher rate relief is given where due by increasing the basic rate band in the tax computation. Employees are then given a higher PAYE code to reduce tax deducted from salary; those filing self-assessment returns pay less tax under SA.

While the money is held within the pension fund, it is exempt from taxes on income and gains, so it grows faster than funds held directly.

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 is used to provide an income (which is taxable). The income can be a purchased annuity for life, or “income drawdown”, in which the fund is still invested and produces the income which can be paid to the pensioner.

Tax relief is due on an individual's gross contributions up to £3,600 (£2,880 net), or 100% of current year employed or self-employed earnings if higher, up to £50,000. If contributions have been below £50,000 in the preceding three years, the unused relief can justify a larger current payment.

When a policyholder takes benefits, the capital value on which benefits are drawn (e.g. as a 25% tax-free lump sum plus an annuity based on the other 75% of the fund) are measured against a "lifetime allowance" (£1.5m in 2013/14). If the lifetime allowance is exceeded, there is a clawback charge on the excess.

Employers can contribute up to £50,000 to employees' pension funds, less any contributions made by the individual. The employer can enjoy tax relief on the cost under the normal rules for trading expenses.

If a policyholder dies before taking any benefit under the scheme, the fund usually passes to dependants free of tax. If death occurs during payment of benefits and a capital fund is payable to dependants, it will be subject to 55% income tax charge.