VCT & pension contributions
richallum
Administrator
Second guessing myself here
Client has earned income of £60k. No other income.
Will make pension contribution of £60k gross and also £25k to a VCT.
What's the tax relief on the VCT?
One for @les_cameron 😜
Paraplanner. F1, Apple, Nutella, ice cream. No trite motivational quotes. Turning a bit northern.
Comments
Hmmm, would be good to get the thoughts of Les.
But my view is that there's no tax relief on the VCT. VCTs act as a tax reducer, so if there's no income tax liability to reduce, then they aren't effective.
Hi
I've had a good look again at this and still come to the same conclusion.
VCT relief is a step 6 tax reducer.
You can only reduce your tax by the amount of your tax liability at Step 5. Your person does have a step 5 liability.
I can't find anything in the VCT manual or ITA2007 restricting relief due to the pension scheme claiming relief at source - https://www.gov.uk/hmrc-internal-manuals/venture-capital-schemes-manual/vcm51000manuls
And I did find this:
https://community.hmrc.gov.uk/customerforums/pt/ea739a2b-bce0-ee11-a81c-6045bd0cee3e
It kind of reassures me my thoughts are correct as if they weren't I think this person would have been told instead of getting a "straight bat" answer.
Yes it's a tax-reducer at 30% of the amount invested against the current year income tax liability. If there is no income tax liability, there is nothing to reduce.
Yes but with the RAS method you do have a liability to reduce but with net pay you wouldn't. Doesn't feel right but then again there are various times a RAS is better than a net pay I think.
Just so I'm 100% right on this, they will get 30% relief on the VCT contribution capped at the Income Tax charge at Step 5?
Paraplanner. F1, Apple, Nutella, ice cream. No trite motivational quotes. Turning a bit northern.
Making a £60k gross pension contribution means that Step 1 is £60,000 (salary) and Step 2 is minus £60,000 (gross relievable pension contribution).
Steps 3-7 are redundant once you make a member pension contribution (to any type of scheme) that is equal to 100% of your taxable income for the year.
A net pay cont reduces total income at Step 1
A making a claim cont is on Step 2.
Both leave no Step 5 liability.
A RAS cont the contribution is paid net of basic rate tax and the tax bands are extended at Step 4. This leaves a Step 5 tax liability.
My previous answer assumed a RAS cont.
A fully correct conclusion would be it depends on tax relief method. RAS yes, others no.
Thanks @les_cameron this one is RAS
Paraplanner. F1, Apple, Nutella, ice cream. No trite motivational quotes. Turning a bit northern.
I'm pondering whether I'm right at the moment. Will be back when I've decided!