While calculating taxes, exemptions need to be taken into account.
Exemptions on Investment
Certain investments carry a tax favored status including:
- UK Government Bonds (Gilts) – While all income is taxable, gains are exempt for income tax purposes.
- National Savings and Investments – Certain investments via the state owned National Savings scheme are not subject to tax including Index linked Certificates (up to £15,000 per issue) and Premium Bonds, a scheme that issues monthly prizes in place of interest on individual holdings up to £40,000.
- Individual Savings Accounts (ISAs) – Interest is paid tax-free, while dividends are paid along with a tax credit to the investor which can then be offset against dividend tax due. For a basic rate tax payer this means they have no tax to pay on a dividend. There is no overall limit on how much a person can have invested in ISA accounts, but additional investments are currently limited to £11,280 per person per year: a maximum of £5,640 in cash funds, with the balance being allocated either to mutual funds (Units Trusts and OEICs) or individual self-selected shares
- Pension funds – These have the same tax treatment as ISAs in terms of growth. Full tax relief is also given at the individual’s marginal rate on contributions or, in the case of an employer contributions, it is treated as an expense and is not taxed on the employee as a benefit in kind. Aside from a tax free lump sum of 25% of the fund, benefits taken from pension funds are taxable.
- Venture Capital Trusts – These are investments in smaller companies or funds of holdings in such companies over a minimum term of five years. These are not taxable and qualify for 30 percent tax relief against an individual’s income.
- Enterprise Investment Schemes – A non-taxable investment into smaller company shares over three years that qualifies for 30 percent tax relief. The facility also allows an individual to defer capital gains liabilities (these gains can be stripped out in future years using the annual CGT allowance.)
- Seed Enterprise Investment Schemes – A non-taxable investment into smaller company shares over three years that qualifies for 50 percent tax relief. The facility also allows an individual to defer capital gains liabilities (these gains can be stripped out in future years using the annual CGT allowance.)
- Insurance bonds – These include offshore and onshore investment bonds issued by insurance companies. The main difference between the two is that corporation tax paid by the onshore bond means that gains in the onshore bond are treated as if basic rate tax has been paid (this cannot be reclaimed by zero or starting rate tax payers). With both versions up to 5 percent for each complete year of investment can be taken without an immediate tax liability (subject to a maximum total of 100 percent of the original investment). On this basis, investors can plan an income stream while deferring any chargeable withdrawals until they are on a lower rate of tax, are no longer a United Kingdom resident, or their death.
- Offshore trusts and companies – Trusts can be offshore if all trustees are non-resident. Such trusts can own foreign-operated companies. Corporation tax rates can be lower in some countries and where we still have double taxation treaties. However, since anti-avoidance rules have been introduced for taxation of trusts, these structures are not advantageous for someone who will remain resident.
Many holdings and income from them are exempt for “historical reasons”. These include:
- Special, low tax arrangements for the monarchy, such as the arrangement used by the British Royal Family to avoid inheritance taxation.
- Reduced income tax for special classes of person. For instance non-doms, who are resident in the United Kingdom but not “domiciled”, are not subject to UK income tax on their non-UK income
- An Act of Parliament to protect the Earl of Abingdon and his “heirs and assignees” from paying income tax on the tolls on the Swinford Toll Bridge
- The income of charities is usually exempt from United Kingdom income tax