What do I do if I cannot put any more money into my pension?
In theory there is no limit in the amount that can be paid into a pension however there is a limit to how much you can put into a pension and get tax relief on. With the annual allowance that you can put into a pension down to £40,000 for most individuals and even lower for individuals earning more than £150,000, more and more people are looking for alternatives.
One of the alternatives that have grown significantly in recent years has been investing into the Alternative Investment Market (AIM). The AIM is a sub-market of the London Stock Exchange which allows smaller, less-established companies to float shares with a more flexible regulatory system than is applicable to the main market. To make this area of the market more enticing to investors the government created ways to invest into this area that provided tax incentives. The investment into AIM and unlisted companies, whilst receiving tax relief can be done through two specific tax wrappers namely Venture Capital Trusts (VCTs) or Enterprise Investment Schemes (EIS) which both have their own individual tax advantages. There are special rules around which AIM shares qualify for these wrappers such as the size of the company which limits the amount of companies that this can be done with.
If you invest into an EIS you can claim up to 30% income tax relief, provided the investment is held for a minimum of three years. EIS shares must be held for three years from the date of issue or the start of the trade if later, otherwise income tax relief will be withdrawn. Once you have held the EIS for more than two years and provided the shares are still held at the time of death there is potential for 100% relief from inheritance tax. You also have the opportunity to defer a capital gain and eliminate it entirely if your EIS shares are still held at death. There is a ‘carry back’ facility which allows all or part of the cost of shares acquired in one tax year, to be treated as if acquired in the preceding tax year with relief then given against the income tax liability of that preceding year.
VCTs enable you to hold a portfolio of different AIM shares which will reduce the risk slightly as you are not just holding shares in one company. If you invest into a VCT you can claim up to 30% income tax relief on the amount you invest in each tax year as long as you hold the shares for at least five years. So if you were to invest £20,000 in a tax year you can claim £6,000 from your income tax bill. The amount of tax reclaimed cannot exceed the amount of tax paid.
In the right situation these wrappers can provide control over income or capital gains tax or even Inheritance tax. They can also be particularly useful for business owners who are trying to defer tax to future years.
It should be noted that investing in AIM shares is a high risk area and only a small portion of your investable assets should be invested in this area. For any financial advice Bradbury Hamilton, are able to advise. Visit www.bradburyhamilton.co.uk or call Sheriar Bradbury on 020 7220 7274 for more information.