Compact Services

The main tax incentives for investment are:

• income tax deduction for amounts invested - the rebate is either at a fixed 30%/50% or at the taxpayer's marginal rate of tax (DED'N in tables below)


• tax exemption on the income from the source (EXINC)


• tax exemption on gains arising (EXGAIN)


• deferral of reinvested capital gains until the new asset is sold (DEFER)

ISA (individual savings account)

Annual investment limit of £15,240 which can be in cash or stocks and shares. No restriction on withdrawal. No relief for losses. Junior ISA limit £4,080 for under-18s has different rules.

VCT (venture capital trust)

Deduction relief is for subscription for new share capital in approved VCT - a quoted company which invests in small, unquoted trading companies. The income tax relief becomes permanent if the shares are held for 5 years. Income and gains (if any) are exempt immediately even for second-hand shares. No relief for losses. Maximum investment £200,000 pa.

EIS (enterprise investment scheme)

Relief is for subscription for new share capital in small, unquoted trading companies. The income tax relief becomes permanent, and gains are exempt, if the shares are held for 3 years. Capital losses are eligible for further income tax relief. Maximum investment £1m per tax year for DED'N and EXGAIN; no limit on amount of investment for DEFER. Investments can be 'carried back' for relief in the previous tax year, subject to the overall annual limit. Other conditions apply.

SITR (social investment tax relief)

Relief is for subscription for new share or loan capital in social enterprises (e.g. charities, community interest companies). The income tax relief becomes permanent, and gains are exempt, if the investment is held for 3 years. Maximum investment is £1m per tax year for all tax reliefs. From 2015/16 investments can be 'carried back' for relief in the previous tax year, subject to the overall annual limit. Other conditions apply.

SEIS (seed enterprise investment scheme)

Similar to EIS, but limit is £100,000 and company must be small and carry on a new trade. If gains are made on other assets, investment in SEIS shares allows exemption of half the gain – effective relief at 9% or 14% on the full gain. Other conditions apply.

PPP (personal/stakeholder pension plan)

Contributions to PPPs are paid net of basic rate tax. The policyholder pays 80% and HMRC pay 20%. Higher rate relief is given by increasing the basic rate band in the tax computation – more tax is paid at 20% and less at 40% or 45%. This relief can be given through the self-assessment system or by adjusting the PAYE code.

Tax relief is due on an individual’s gross contributions up to £3,600 (£2,880 net), or 100% of earnings if higher, up to annual allowance of £40,000 pa. Higher contributions can be made by utilising unused annual allowance from any of the preceding three years. Employers can contribute up to £40,000 per annum to an employee's pension fund, less any contributions made by the individual.

Excess contributions are taxed at the individual's marginal rate of income tax. The employer can enjoy tax relief on the cost of those pension contributions under the normal rules for business expenses.

While the money is held within the pension fund, it is exempt from taxes on income and gains, so it grows faster than investments held directly by an individual.

From 6 April 2015 investors in personal and other defined contribution pension schemes have the right to access all of their pension savings once they reach age 55. When the investor takes benefits from the pension scheme, under flexi-access drawdown up to 25% of the accumulated fund can be drawn as a tax-free lump sum. However the balance is taxed at the investor's marginal rate of tax that applies in the year those benefits are drawn.

The capital value of all of someone’s pension benefits is measured against a "lifetime allowance" when the first benefits are drawn (£1.25m in 2015/16). If the lifetime allowance is exceeded, there is a clawback charge on the excess.