Smart investors want their cake and to eat it too – that means looking for great returns that are boosted by tax breaks.
UK taxpayers have a range of choices for tax-free returns on investing their money.
Top of the list is a pension.
Most investors have an annual saving ceiling of £40,000, but this tapers down to just £10,000 for top-earners paying 45% income tax.
The question then becomes what to do with any excess cash.
Where to invest when your pension maxes out
The first port of call after a pension is typically an ISA, investments grow tax-free and no tax is due on money taken out, but the ISA limit is low – just £20,000 a year.
Once pension and ISA limits are maxed out, tax breaks with investments become sparser.
Next on the list is the Seed Enterprise Investment Scheme (SEIS).
Investors can sink up to £100,000 every tax year – and in return HM Revenue & Customs offers a 50% refund against income tax paid, capital gains relief and loss relief to reduce the pain if the company fails.
After SEIS comes the Enterprise Investment Scheme (EIS). This is SEIS’ bigger, older brother.
Investors have a £1 million a year limit and similar tax breaks as SEIS, except the 50% rates are sliced to 30%.
No compromising tax or returns
Venture Capital Trusts (VCTs) also slot in here. A VCT has an annual cap of £200,000 with 30% relief on income tax paid.
Trailing the field comes the smaller and less-known Social Investment Tax Relief (SITR) with a £1 million cap and 30% tax relief, much like EIS.
The good news is if you are flush with cash to invest and have already hit your pension and ISA limits, there are plenty more chances to boost your investments with tax breaks.
Even better, the choices are not either/or as each investment is a standalone entity and investing does not impact the limits or reliefs offered by another scheme.
So, you can easily use your pension, ISA and SEIS reliefs alongside each other each tax year without compromising tax savings or returns.