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Investment tax planning

When it comes to investing, making the most of tax efficient vehicles is paramount. These include:

ISAs

You can invest an amount in an ISA every year. The amount invested does not attract tax relief but the income and gains on the investment are tax free, so any taxpayer will benefit from the tax shelter on the income arising. Tax credits on dividend income cannot be recovered. However investments in an ISA are not free from a charge to IHT on death.
The limits for each individual for ISA investments for 2011/12 are £10,680 in total (with up to £5,340 in a cash ISA).

These two schemes allow ingoing tax relief on investments that are channelled into venture capital for smaller and growing businesses. By their very nature they are considerably more risky than ISAs and other similar investment vehicles.
The EIS scheme provides 30% tax relief (20% before 6 April 2011) on investments of up to £500,000 in a tax year. This limit is set to double to £1 million on 6 April 2012. Investments can be carried back by up to one year provided the limit in the previous year was not reached.
EIS shares are exempt from capital gains tax once they have been held for three years.
Capital gains tax on the disposal of other assets can be deferred by reinvesting the proceeds in EIS shares. This relief is slightly different from the basic EIS relief, as there is no limit on the gain that can be reinvested in this way. However, the tax on the original gain will become payable when the EIS investment is sold. The reinvestment can take place up to three years after (or one year before) the original disposal.
VCT investments are made through a fund, so the risk on individual investments is spread across the fund. The tax relief is 30% of the amount invested, with a limit of £200,000 in any tax year.
VCT investments are not subject to capital gains tax if they are held for 5 years. Dividends are not subject to higher rate tax, but the tax credit is not repayable.

Pension contributions are paid net of basic rate tax, and the pension provider recovers the tax element. Up to £3,600 per year (gross) may be invested by any individual irrespective of whether they have earnings to match it or not.
Pension contributions also save higher rate tax for those liable, and this relief is normally given through the self assessment return.
Tax relief is generally only available for pension contributions of up to £50,000 a year.