Obtaining a refund on your tax bill
Mar 07, 2018
If you paid your 2016/17 tax bill before the 31 January 2018 deadline, you may also have paid 50% of next year’s tax on account. If so, here are a couple of tax planning ideas that could help you obtain a tax refund.
Invest in EIS, Seed EIS qualifying companies or VCTs
Before 6 April 2018, individuals may invest in companies that qualify under the Enterprise Investment Scheme (EIS) and treat that investment as having been made in 2016/17. The tax relief is 30% of the amount invested. So a £20,000 investment can reduce the 2016/17 tax liability by £6,000. Investing in a Seed EIS qualifying company is even better as there is a 50% tax relief. Such companies tend to be riskier than EIS qualifying companies. You should therefore obtain specialist advice from an IFA if you are considering such investments.
Investing in an EIS qualifying company can also enable you to defer capital gains tax. In order to do so you must reinvest the amount of the gain within the 3 years following the date of the disposal giving rise to the gain. (The investment could also be within 12 months prior to the disposal).
Investing in a Venture Capital Trust (VCT) can also attract tax relief at 30% of the amount invested. Dividends and capital gains can be tax free, but as you would expect, there are conditions attached, so please speak to us or you IFA before investing.
Increase your Pension Savings before 6 April 2018
Unfortunately investing more in your pension now will not reduce your 2016/17 tax bill. However, if you invest before 6 April 2018, then this payment can be taken into consideration when calculating your 2017/18 liability, and hence you might be able to claim to reduce your payments on account. The maximum pension contribution is generally £40,000 each tax year, although this depends on your earnings. It is also possible to add to this any unused relief brought forward from the previous three tax years.
Exceeding the annual pension allowance
If your pension savings exceed the annual pension input limit (generally £40,000) then there is an annual allowance charge. The effect of the annual allowance charge is to reduce tax relief on any pension saving over the annual allowance.
The annual allowance charge is not at a fixed rate but will depend on how much taxable income an individual has, and the amount of their pension saving in excess of the annual allowance. Hence for a higher rate taxpayer the charge would be 40% on the excess over the annual pension allowance. Note that annual pension input includes any contributions made by the employer, and it may be those contributions that trigger the charge.
You can ask your pension provider to pay HMRC out of your pension pot if you’ve gone over your annual allowance and the tax is more than £2,000. You must tell your pension provider before 31 July if you want them to pay the tax charge for the previous tax year.
If you’d like to have a chat about any of these options to reduce your tax bill then please do give us a call.