Cutting tax on bonus

Fatbritabroad

I'm about to get a decent size (nearly 40k) retention bonus come up at work and was looking as ways to minimise the tax on it. I asked if they could give it me as shares which they say they can't due to hmrc rules (not sure that's true the bankers set to do it). I can pay it into my pension but I'd ideally like it in a form I can access in say 1 to 5 years

Any thoughts or is pension or cash the only option

bowlhead99

You are right that getting paid the money, paying tax and getting the cash is the most flexible but highest tax method, while giving it all up into a pension will result in zero tax now but loss of access until your personal pension access age in your late 50s. You could give it all to charity to avoid tax but that's not going to help you access it in 1 to 5 years

A less mainstream solution is to invest some of it into venture capital trusts (VCTs). These are tax efficient investment funds which invest subject to specific government criteria, putting the vast majority of their money as expansion capital into young UK companies; the government incentivises this by giving you 30% tax relief on the amounts contributed in the tax year you make the investment (the 30% is fixed no matter whether you are a 20% or 40% taxpayer) as long as the amount of relief doesn't actually exceed the total tax you have paid on all your other income for the year. If you sell your shares in the fund within five years of buying them, you would have to pay back all the intial tax relief you'd been given - although any dividends to that point would have been tax free.

Although on the face of it these are unsuitable because you've said you might want the money in 1-5 years (meaning you'd have to give back the tax relief and likely take losses on the investment selling your shares in the fund on to someone else second-hand), it might be that your "a form I can access in 1-5 years" is not your need for ALL of the money, and perhaps a quarter of the £40k could be left ten years invested in a couple of VCTs without any concerns, getting 30% relief on the £10k investment and saving you £3k off the tax bill in the year you make the investment.

VCTs are higher risk than most mainstream investment funds (which is why the tax incentives exist), however depending on your age and other assets, you might find it preferable to stick £10k into such an investment scheme for £3k tax relief to reward an investment you keep for perhaps a decade, rather than lock £10k into a pension and be given the £4k tax relief for a commitment of two or more decades.

Pension tax relief remains the most 'mainstream' way of avoiding tax on a bonus - it can save you in excess of 40% marginal rate if your other income plus all that bonus would have been enough to give you an extra charge to claw back child benefit at over £50k , or to lose some of your personal allowance at over £100k. So generally worth doing on at least a portion of new and unexpected money that you earn, even if not the whole £40k.

Fatbritabroad

Thanks as always bowlhead99 I for one don't mind your comprehensive 'longwinded' answers

its probably a good idea as you say do maybe half and half. I don't know enough about vcts at the moment to consider those though I have people I can ask

Fatbritabroad

PS I was always under the impression there were large minimum investments for vcts but assume there's lower entry points?

bowlhead99

Fatbritabroad wrote:

Thanks as always bowlhead99 I for one don't mind your comprehensive 'longwinded' answers

its probably a good idea as you say do maybe half and half.

I can understand why you might be reluctant to put as much as half of your 'windfall' into a pension where you can't get at it for decades.

However one thing to consider is that if you have made an extra one-off pension contribution this year of £20k or whatever (saving a good chunk of higher rate tax), then your pension assets will be bigger when you look at them in a couple of years than if you had not done that.

The practical consequence is that you can then afford to not make quite as large pension contributions in those later years as you would have otherwise done (assuming you are already doing more than the minimum amount to qualify for employer matching free money) - you could cut back.

So: if you were thinking that you *might* need cashflow in a few years and that niggling doubt was preventing you from doing the pension now, consider that actually doing the pension now is an extra boost to retirement assets and if you decide you don't really want that boost because on balance you need more cash in your bank account in the year 2021 for some key event or expenditure (and tax consequences of taking cash in hand is fine in the context of the importance of that event or expenditure)... , then just reduce your usual pension contributions in 2020 and 2021 by £500pm and you'll effectively get £12k of extra gross money back in your hand over the two year period (after paying tax of course).

This allows you to take tax relief now, and only 'give it back' if it turns out you really did need some of the money in your day to day life after all, which turns out to be more important to you - on balance - than getting the tax relief.

Obviously it is inefficient to make a massive contribution now and save only 20% tax on some of it (depending on your level of other income such as salary in the tax year you get the bonus), and then realise you have overcommitted so you forgoe future contributions at 40% relief with 100% employer matching...

So it can require thought and planning. Which I guess is why you are here.

Fatbritabroad wrote: »

PS I was always under the impression there were large minimum investments for vcts but assume there's lower entry points?

VCT is maximum £200k pa, not minimum. Probably a majority of them have £5k minimum but some are £3k. Exceptionally you will find the odd one at £2k (like Unicorn VCT this year) but unlikely to still available around by 5th April because they tend to fill up their relatively small amounts each year. Examples here

http://clubfinance.co.uk/Open-VCT.php
http://clubfinance.co.uk/VCT-funds-raised.php


If you were doing just a small amount like £5-10k for a tax year it would be 'eggs in one basket' to do just one product. However, if for example you had £8k, you could do a £5k one and a £3k one, and you could tell each manager on your application form that you wanted half of each application to be applied in the current tax year and the other half in the new tax year in a month's time. You would then be left with a modest £4k investment for each of the two tax years (saving £1200 off each year's tax bill), but split across two different fund managers.

The tax saving can more than enough to offset the higher fees and higher risks, but is more for people who have higher income and wealth levels as pension and S&S ISAs are the mainstream allowances to use first.

The higher risk / higher commitment one would be enterprise investment scheme (EIS) where you are not investing in a single fund vehicle which holds a portfolio and has a stock exchange listing, but into underlying companies who want capital. In order to get a diversified approach you would probably go through a specialist wealth manager sourcing the opportunities, by giving them £20k+ and asking them to split it over a few opportunities that come up. The tax relief is only available once the investments are actually made and the company gets HMRC tax clearance, and there is no ready market for you to get out early. So EIS is a pretty high barrier to entry compared to VCT - which is comparatively mainstream next to EIS but quite exotic compared to 'normal' S&S funds in an ISA or pension.

Fatbritabroad

Many thanks I think ill put some in my pension probably 10k minimum and take the rest as cash as I wanted to update my kitchen too. And wanted to increase my cash a bit. As you've said in a different post this is a little low at the moment 17k now and building back up monthly anyway as I did some upgrades on my property this year. I've kept enough for 6 months as an emergency but I'm used to having twice that as I'm naturally cautious but I wanted to start my s and isa

I do contribute a decent sum (13 to14k) gross to a pension anyway so it was weighing building my isa and cash and other medium term savings against the tax hit as I took on board your comments about these providing more flexibility if I want to cut down on work early. Realistically I can't see that happening with my lifestyle vs income but it's nice to have a bit more cash in the bank as I have more in long term savings (isa) than short at the moment. This was a quick way to get the cash up to a level I tend to prefer to feel secure (I get very stressed now as I'm the main breadwinner whereas with my ex partner we lived well below our means and could afford holidays etc and still salt a decent sum away) my girlfriend can't understand how someone with 40k in saving and my pension can worry about money. She's probably right to be fair!


all I basically want to see if that my net worth increases every month. I figure I can't go too far wrong as long as this is going up not down!