Whilst panic-selling of shares makes as little sense as panic-buying of toilet-rolls, the smart investor will continually reassess their views in the face of new information. With stock market falls of 10% in a single day we are compelled to consider how much of that is justified and how much is caused by hysteria. This prompts the question ‘are markets rational?’.
My view is ‘sometimes yes, sometimes no’. With so much uncertainty there are two truths I find myself reverting to, time and again:
1. We cannot predict the markets;
2. We can guarantee a positive return by engineering a known tax advantage.
Fast approaching the tax year end, it is worth investors knowing that it is possible to generate a return of 60% guaranteed. Let me explain how.
Earnings above £100,000 cause the Personal Allowance (£12,500 of tax-free income) to be tapered down to zero; so that those earning greater than £125,000 do not have a personal allowance at all. By putting £20,000 into pension, someone with £125,000 of taxable income could turn their £20,000 contribution into £35,000.
HMRC award £5,000 basic-rate relief into the pension, so £25,000 is the starting investment. In addition HMRC pay £10,000 of higher rate tax back to the individual. This kind of strategy is something high earners may want to consider. Additional-rate pension tax relief is also achieved for those earning greater than £150,000.
For employees who receive options and RSUs as part of their remuneration package. These awards of company stock attract income tax, in much the same way as earned income. We can use such awards to help fund the pension contribution whilst shielding the realisation of the options and RSUs from the tax charge they would otherwise face.
The strict limitations on how much can be put into a pension, mean it is essential to take professional advice in order to assess your ability to ‘carry forward’ any unused pension contribution allowance from the previous three tax years before it is lost forever.
Around this time of year we also see a flurry of activity as investors look to secure the certainty of a 30% uplift in value using Venture Capital Trust (VCT) investment. VCTs provide exposure to a listed portfolio of smaller, usually unlisted, companies. It is all very well engineering a guaranteed uplift by way of the tax reclaim but it also pays to ensure the companies receiving your investment are of the highest quality.
Due in part to the restrictions on pension funding, VCTs have been in greater demand in recent years. By their very nature investing in smaller companies, this increase in demand means the best quality VCTs fill up their funding target and reach capacity ahead of the tax year end.
However, many VCT providers offer the facility to bank your allotment for the next tax year. By putting the money up ahead of time, it is possible to secure the best quality investments and know that you have a further 30% tax reclaim ‘in the bag’ to look forward to.
Written by John Clamp BA (Hons), FPFS, EFP