The UK is experiencing remarkably elevated tax rates, reaching levels unprecedented since the 1940s. Despite this fiscal landscape, the extensive nature of the UK tax code, which comprises of more words than the average person will read in a lifetime, has created many loopholes that those with the knowledge, skills, and resources can utilise to minimise their tax liabilities. The key to navigating this complex terrain is effective financial planning.

Drawing parallels to the strategies employed by football clubs to make significant signings while avoiding Financial Fair Play (FFP) penalties, the art of tax planning involves strategic decision-making and leveraging legal opportunities within the tax code. High-profile English Premier League clubs, such as Chelsea, which spent over £2 billion in the recent transfer windows, showcase how skilled financial planning by professional accountants can advantageously balance the books.

How tax and financial planning can help you

1. Investing

The UK government has introduced two schemes to incentivise investment in British businesses: the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).

SEIS: Primarily targeting start-ups under two years old, SEIS aims to reduce investor risk. Contributors can fund up to £100,000 per tax year, receiving upfront income relief of up to 50% from the government.

EIS: Tailored for larger businesses, EIS allows investments of up to £1 million annually, providing investors with up to 30% tax relief. These schemes not only mitigate investment risks for individuals but also offer businesses an alternative to expensive bank loans, plus it allows them to tap into the investor's network and business acumen.

Additional benefits for investors include:

• A stake in a company with ambitious growth plans
• Exemption from Capital Gains Tax (CGT) upon selling shares
• 50% CGT relief on gains reinvested in a SEIS-eligible company
• Deferral relief for existing CGT liabilities
• Up to 50% Income Tax Relief under SEIS
• SEIS loss relief for shares sold at a loss
• Inheritance Tax exemption on SEIS shares held for over two years
• Potential for multiple returns with a reduced base cost and no payable tax

2. Investing in Venture Capital Trusts (VCTs)

VCTs are specialised investments designed to encourage funding for small, high-risk organisations.

Key benefits include:

• 30% income tax relief on the invested amount after holding the VCT for five years
• CGT exemption on VCT shares
• Tax-free dividends, negating the £1,000 dividend allowance

3. Avoiding the Effective 60% Income Tax Rate

With three tax rates in the UK (20%, 40%, and 45%) and a tax-free personal allowance of £12,570, individuals face a unique challenge if their income exceeds £100,000. Adjusted net income reduction results in a loss of the personal allowance, effectively imposing a 60% tax rate on income between £100,000 and £125,140.

A strategic approach to avoid this high tax bracket is by increasing your pension contributions. The government encourages retirement savings by offering tax relief on pension contributions, providing a safeguard against breaching the £100,000 income threshold.

Conclusion

While the outlined strategies offer effective means to reduce your personal tax liability, navigating the intricate world of tax relief requires caution. Mistakes can lead to potentially severe consequences, including fines, tax investigations, and even possible criminal charges.

To mitigate risks and optimise tax planning, seeking professional advice is paramount. Professionals possess a sufficient grasp of tax law to recommend the best strategies and ensure compatibility between tactics, maximising potential savings, complying with legislation, and minimising any associated risks.

Find out more about personal tax planning with Wellers.