Do VCT / EIS reduce allowance?

Hi, firstly sorry if this has been covered before but I'm struggling to find it both here and elsewhere.


Some basic numbers for illustration;
Earnings £20k, currently paying the basic £2880 (£3600 tax adjusted) into a priv pension.


Q: I'm making tax efficient investments (VCT's or EIS/SEIS etc) to reduce my income tax bill to zero, does that mean my allowance is reduced to the basic £2880 or could I put the full £20k into a priv pension?


I'm probably wrong, but I think of the tax break on pension contributions as a way of offsetting income tax, hence the cautious £2880 current contributions. Could I contribute upto the full £20k without affecting my £0 tax bill?


Any help would be much appreciated.


S Me

Comments

  • Albermarle
    Albermarle Posts: 21,642
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    Not 100% sure about the answer to your question but seems unlikely your can get double tax relief on the amount of tax paid.
    Must say it is unusual for someone with a relatively modest salary to be choosing to invest in high risk investments for tax relief , rather than by he usual pension route.
    Normally VCT's are only recommended for wealthy people who have maxed out all other ways of reducing their tax bill.
  • Numbers are only really for illustration, being self employed with an unhealthy tendancy to be lazy for extended periods, my income varies greatly in the low to mid 5 figures. An inheritance also gives me a decent cushion.
  • Have to disagree.

    If the op's only taxable income is £20k and they aren't in a company pension then they will have a tax liability of £1,500 (assuming not a Scottish resident for tax purposes and they haven't applied for or received Marriage Allowance).

    £20,000 - £12,500 PA = £7,500 x 20% = £1,500

    Contributing £16k to a relief at source pension scheme will not make any difference whatsoever to their personal income tax liability. The pension company will add £4k basic rate relief and the op will have a basic rate band £20k larger than the standard basic rate band. Which is of no benefit whatsoever as they are only paying basic rate tax in the first place.

    So in that situation VCT or EIS relief would reduce the personal income tax payable.

    Happy to be corrected if I've misunderstood.
  • bowlhead99
    bowlhead99 Posts: 12,295
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    Have to disagree.

    I agree with you, sorry for any confusion - what I wrote was a bit of a mess.

    If the pension is a relief at source one (which it should be, to maximise the relief, and it would be, being self employed with no access to an employer scheme), the pension contributions don't reduce the tax bill. So you can reduce it with VCT.

    I'll just delete my post rather than try to heavily edit it and make the thread seem disjointed :)
  • Brynsam
    Brynsam Posts: 3,643
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    simpleme wrote: »
    Some basic numbers for illustration;
    Earnings £20k, currently paying the basic £2880 (£3600 tax adjusted) into a priv pension.


    Q: I'm making tax efficient investments (VCT's or EIS/SEIS etc) to reduce my income tax bill to zero, does that mean my allowance is reduced to the basic £2880 or could I put the full £20k into a priv pension?

    Just for clarity - you can't put the full £20K into a private pension. You can put in £16K and the provider than claims basic rate relief of £4K and that's what makes it '£20K'.

    I think that's what you/others have said/meant, but in case anyone else reading the thread...!
  • jamesd
    jamesd Posts: 26,103
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    simpleme wrote: »
    I'm making tax efficient investments (VCT's or EIS/SEIS etc) to reduce my income tax bill to zero, does that mean my allowance is reduced to the basic £2880 or could I put the full £20k into a priv pension?
    Not reduced. Your pension calculations are done first and HMRC calculates the income tax due for the year. That amount due is reduced by 30% of the VCT purchase value, but never to below nil. If you've paid more tax than the amount due HMRC will refund the difference.

    So no problem to pay 20k gross into the pension.
  • ffacoffipawb
    ffacoffipawb Posts: 3,593
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    jamesd wrote: »
    Not reduced. Your pension calculations are done first and HMRC calculates the income tax due for the year. That amount due is reduced by 30% of the VCT purchase value, but never to below nil. If you've paid more tax than the amount due HMRC will refund the difference.

    So no problem to pay 20k gross into the pension.

    In that case there would be no relief on the VCT investment if tax position is nil due to the large pension contribution?
  • In that case there would be no relief on the VCT investment if tax position is nil due to the large pension contribution?

    Can you explain how a relief at source pension contribution affects the op's personal income tax liability so they have no tax to pay?
  • jamesd
    jamesd Posts: 26,103
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    In that case there would be no relief on the VCT investment if tax position is nil due to the large pension contribution?
    Same mistake as the questioner.

    You pay the tax in PAYE or via self-assessment.

    The pension contribution is made net and basic rate relief is added inside the pension. This doesn't get paid out of the tax deducted or reduce the tax deducted, except that HMRC increase your basic rate band by the gross to give higher rate relief.

    So the pension contributions only reduce the amount of VCT relief available for higher rate tax payers.

    Been there, done that, got the refund from HMRC.
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