Find out what our members have been asking us this month…

 

Q

Our clients’ 25/26 projected taxable income is as follows:

25k  Lettings

10k  Bank Interest

15k  Gross Loan note interest

3K Stopped in tax

5k   Dividends

Roughly ends up with a Tax bill of  circa 8k  less the 3k  – so pays 5k.

If he invests 20k into an EIS share this tax year could he set the 6k tax credit against the 8k liability? ie you can set off against the liability with his income being derived from these sources.

 

A

If an eligible EIS investment is made, an income tax reducer of 30% can be claimed. Making an investment of £20,000 would mean a £6,000 tax reducer.

Based on your figures, this would be deducted against the £8,000 tax bill to bring the total amount payable to £2,000 for the year. As he had already paid £3,000, he would obtain a refund of £1,000.

He could not reduce the total liability to any less than nil. E.g. if he invested £30,000, with a tax reducer of £9,000 this would only reduce his tax bill from £8k to £0, it would not create a loss/refund beyond that so the remainder would be wasted.

If he disposes of the EIS investment within 3 years then the income tax would be clawed back and would need to be repaid.

 

 

Q

I have a client whose income exceeds £100k and so he makes a pension contribution to bring his income so he is entitled to the 30 hours childcare.

I won’t use exact numbers but I want to check this. If he earns £110,000, he then makes a physical cash contribution of £9,000 before 05/04/2026; his adjusted net income is £110,000 – (£9,000x 1.25)=  £98,750. This is under £100k so he would remain eligible for 30 hours childcare.

I am sure this is right but last year he got a call from the childcare people and the calculation they did was £110,000-£9,000. They did not gross up the pension contribution.

Please can you confirm that my understanding is correct?

 

A

We can confirm that your understanding in respect of your client’s adjusted net income calculation is correct.

Eligibility for 30 hours free childcare is based on an individual’s “adjusted net income” as defined by Section 58 of the Income Tax Act 2007.

Where an individual makes a personal pension contribution under a relief-at-source arrangement (eg SIPP), tax relief is given on the gross amount of the contribution. As adjusted net income is calculated by reference to net income, the deduction for pension contributions is the gross relievable amount, not the net amount physically paid.

Therefore, a net pension contribution of £9,000 is treated as a gross contribution of £11,250 for the purposes of calculating adjusted net income.

 

If you have a question similar to the above or want to know more about our Tax Partner Pro membership please drop us an email enquiries@etctax.co.uk