income tax bill

How to Reduce an Income Tax Bill



Posted on: 7th December 2021

High-earning clients have a lot of financial worries and look to reduce their costs as much as possible. One of the keys aims for them is to reduce their income tax bill.

Tax-efficient investing such as an Enterprise Investment Scheme (EIS) could enable high-earning clients to reduce their income tax for both the current and previous tax year. How it works could be confusing to those who are not good with numbers, which is why we always recommend talking with independent financial advisers Cheshire to get the full breakdown and expertise available to you.

Here we will inform you a little more on what EIS is and how it works to reduce your tax bill.

What is EIS?

The Enterprise Investment Scheme is a government-created incentive designed to encourage investment in smaller, growing businesses. The benefits of EIS investment is money that is invested into these small companies – or funds that qualify – and provide valuable tax advantages as a result.

Small businesses create jobs and generate tax for the UK economy, which is the main attraction for the UK government to offer such an incentive. More experienced investors like having the chance to invest in newer and exciting businesses and gaining the reward of a hefty tax relief.

By taking this route, investors can claim up to 30% income tax relief on either the current year’s tax bill or the previous via a carry back facility. They are also able to defer capital gains that are made elsewhere by investing in the scheme.

If the investment turns out well, the investor will also have no Capital Gains tax liability and, provided the EIS is held for at least two years or held until your death, it will be free from inheritance tax. If the EIS investment does not work out, there is a way to offset any losses against your income or capital gains tax.

Whilst this sound fantastic as a way to reduce your income tax bill, any investment should be made on the merits of the investment and not the relief you stand to attain.

Are There Risks?

Investing in smaller businesses will always be a bigger risk than investing in a bigger one, with smaller running more risk of failing and investments being harder to sell. This is a reason why the government offers various tax benefits on EIS.

If things do not work out with your investment in a small business, reliefs can soften the blow had – and if the investment works out and the firm succeeds, the gains will be greater. The thought of losing money is never appealing – but in receiving an initial 30% tax relief, your investment value would have to decrease by 30% before you even start to feel out of pocket over it.

How does an EIS work? To gain a better understanding for your specific circumstances, it is advised that you discuss income tax relief and investment advice Manchester with the team at Haven IFA. Contact us today for all advice on ways to relieve taxes.

Posted in Tax