Start up and early stage businesses could profit from the government’s rumoured intention to slash tax relief on pension contributions.
Both the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) could benefit as a tax haven for retirement savings that would otherwise go into pensions.
This is because Chancellor George Osborne has dropped some heavy hints that he plans to slash higher and additional rate tax relief on pension contributions to a 20% flat rate.
If he does so, SEIS and EIS would leap to the head of the queue offering much more attractive tax breaks.
SEIS dangles a 50% refund on income tax paid when staking cash on a start up, plus capital gains tax discounts and loss relief if the new company fails.
Tax relief may go for high earners
EIS offers similar rewards – only at 30% instead of 50% – but well in excess of Osborne’s supposedly favoured 20% flat rate pension contribution relief.
Not only are higher and additional rate tax payers facing reductions in tax relief when they pay into a pension, but they will also see the lifetime allowance trimmed from £1.25million to £1million.
Those earning more than £150,000 a year will also see the amount they can contribute into a pension taper down from £40,000 a year to £10,000 a year for the few earning £210,000 or more.
Since SEIS was introduced in April 2013, almost 3,000 companies have received £250 million in investment.
Big bang investments
Investors should be aware that SEIS is a much different investment proposition from a pension.
Some startups can show exceptional returns – but SEIS is a short term investment of three years, while pensions are not big bang investments, but wrappers for the slow and steady accumulation of funds over many years.
Wealthy investors may well wish to diversify a small part of their savings to SEIS or EIS, but the risk of failure is high.
To date, SEIS performance is hard to gauge as the first companies are about to emerge from their hothouse investment in April 2016 and because HM Revenue & Customs (HMRC) is almost a year behind in generating statistics for the sector, news of success and failure may well lag too.
The guide is downloadable from SEIS.co.uk , and provides an easily digestible source of vital information for anybody who could benefit from the scheme.
