Accelerating Your Progress – Part Three

Continuing the blog series on accelerating your progress – other things you need to do.

Take Every Bit of Free Money Going

If I knocked on your door right now and offered you a £50 note, with no strings attached, you’d take it, right? Once you got over your suspicion of a random northerner offering you money! The personal finance system is set up so that we can benefit from free money in quite a few ways, and we need feel no hesitation whatsoever about taking every opportunity to do so.

The first is obviously tax relief, and we talk about this primarily in pensions. Whatever you personally put in gets 20% relief automatically, so if you put in £80, you get £20 more added in to your pension to make £100. If you’re a higher rate taxpayer, you get an additional 20% off your tax bill when you complete your tax return. It’s only cost you £60 to get £100 into your pension.

You also need to understand Enterprise Investment Schemes (EISs) and Venture Capital Trusts (VCTs). These are both mechanisms designed to attract investment into smaller, growing firms by offering tax breaks to investors (i.e. you).

Let’s be clear right from the start that smaller, growing companies are far more likely to fail than larger, more well-established firms. If you invest in a company that fails, you could lose everything, so be sure you’re comfortable with that eventuality before getting too excited about the tax breaks.

Both EISs and VCTs offer 30% tax relief, but you need to have paid enough tax to justify the relief. Let’s say you have paid £10,000 in tax over the year from your employment and you inherit a chunk of money. If you invest £100,000 into an EIS, you won’t get £30,000 tax relief because you haven’t paid that much tax, you’ll only get the £10k back.

With EISs you have to hold the investment for three years to keep the relief; with VCTs, it’s five years. You get the tax relief through your tax return, but would have to pay it back if you cancelled your investment within these timeframes.

You get some capital gains tax benefits too, so these are worth considering if you have made gains elsewhere. You can even get loss relief, and offset your income tax with that loss. One little-known advantage with a VCT is that when it matures after five years you can roll over the proceeds and get the tax relief again – on money that you’ve already had tax relief on!

Salary Sacrifice

This is a mechanism whereby you can sacrifice some of your salary in return for a higher pension contribution. Your employer also saves National Insurance contributions, and many employers will pay that money into your pension in addition. Ask your pension or HR department or whoever is responsible for managing payroll and pensions what the deal is with your firm.

This can be fairly significant. Employers’ NI is 13.8% on salary above a certain amount, so if you sacrifice, for easy figures, £10,000 and your boss is happy to pay in the NI saving too, that’s an extra £1,380 going in at no extra cost to you or your company. Oftentimes you have to commit to the sacrifice for a year, so make sure you don’t leave yourself short of spendable money in the meantime.

Employer match

These days, your employer has to put in a minimum of 3% into your pension, but many will add in more if you do the same. It makes the best sense, I believe, for you to contribution as much as you can up to the employer match. If they will match up to 7% of your salary into your pension, then try to put away that 7% yourself to lock in all the match. Otherwise we’re just leaving money on the table when it is there for the taking.

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