The riskier the investment, the better the tax break is a rule of thumb for investors.
Savings and investments can range from cash in the bank through ISAs to the mouth-watering tax benefits of the Seed Enterprise Investment Scheme (SEIS).
For investors wanting to balance risk and returns against tax, here’s a look at some of the pros and cons:
Cash savings
Interest rates are rising really low and the returns on savings are meagre – some of the best on and offshore accounts only offer between 2% and 3% and require savers to tie-in several thousand pounds for three to five years.
Risk factor: Low
Points to watch: The returns are fixed, but inflation and income tax can wipe a slice off any returns.
ISAs
ISA’s are Good for UK tax residents, but no benefits for expats. No tax relief going in but no capital gains on growth or withdrawing the cash
Risk factor: Generally low but depends on the fund or companies where investments are placed
Points to watch: Headline rates often only last for a year, so check what happens when the introductory offer runs out
Pensions
No tax relief going in and pension contribution relief at your marginal rate on savings. No capital gains tax on growth. Pensions pay 25% of the fund tax free on exit, but income tax is due on the balance of the fund.
Risk factor: Same as ISAs
Points to watch: Not all providers offer flexible access and a small number have exit charges of between 2% and 5%. Money is inaccessible until the retirement saver is aged 55.
VCTs
Investors can pay in £200,000 a year in return for 30% income tax relief and no capital gains tax on share gains. No tax on dividends.
Risk factor: High
Points to watch: Shares must be held for at least five years to qualify for tax breaks
Seed Enterprise Investment Scheme (SEIS)
Arguably the riskiest of all tax incentivised tax breaks. SEIS investors can stake £100,000 a year for a 50% relief on income tax paid, qualify for capital gains tax breaks and loss relief if the start up fails
RISK: High
Points to watch: For sophisticated investors wanting to become involved in the business they invest in. Some managed funds offer diversification across a number of start ups in an effort to reduce risk. Three in tie-in to qualify for tax reliefs
Enterprise Investment Scheme (EIS)
EIS is the big brother of SEIS. EIS offers similar tax reliefs to investors taking large financial stakes in growing businesses.
Swap out 50% SEIS reliefs for 30% reliefs in EIS.
RISK: High
Points to watch: Same as SEIS
