The Million Pound Impact of Tax Led Investing for High Achieving Entrepreneurs

Welcome to this months blog where I aim to leave you:

  • Enlightened
  • Excited
  • Empowered

To see the impact that lies ahead of you with a sprinkle of tax-led investment planning. 

Why am I qualified to talk to you about Tax-Led Investment Planning?

I have been working my magic in the space of tax-led investment planning now for the last 8 years as a chartered financial planner, but I have been working in the investing space designing investment solutions and teaching financial professionals about these solutions for the last 24 years. 

Tax-led investing is the best-kept secret out there. 

Why? 

Because if you step into the power you have to build wealth through tax-led investing for yourself, investing into the causes you care about, you are owning your power. And let’s face it, the wealth management industry wants to keep the power, it’s how they make money after all! 

Tax-led investing isn’t something that we should fear. Tt is something we must know about, because it can be the means of High Achieving Entrepreneurs & High Earners in Business to spread their impact beyond their own business ventures and as a thank you, to save tax along the way.

In the blog I want to share with you 3 lessons. 

Lesson 1: The million-pound impact of tax-led investment planning!

Lesson 2: The 3 tax-led investment strategies entrepreneurs need to know about to hold on to profit!  

Lesson 3: Learn the 3 simple ways to wealth map your Six Figure business to build a million pound independence fund

Firstly, what is tax-led investment planning?

Tax-led investment planning is giving every £1 you make a purpose beyond what you need to spend or invest on your lifestyle today, so that you invest for a tax-led consequence.

Aka you invest to either hold on to money you would otherwise lose to tax in the present moment. You should aim to only pay tax on wealth you don’t need to spend in the present moment to fund your lifestyle. For the rest then you should intentionally invest the money to hold on to wealth, to save either further tax or even better, reclaim tax.

NOW HUGE CAVEAT, this is for UK-based investors, I am trained and qualified in the UK but the concepts are applicable if you’re outside of the UK the planning concepts and compounding impact we will discuss can be applied to your local jurisdiction. But this isn’t financial advice, I do not know your personal circumstances. And the rules are constantly changing, with hopefully a new government in the UK coming, the things we cover in this webinar, the technicalities can change.

HOWEVER, the concept of tax-led investing does not change. We will always want to take a tax-led investment approach to the managing profits and earnings we make, and adapt to the ever changing rules.

Some beautiful side effects of tax led investing

Before we dive into the lessons I want to bring to life the beautiful side effects or deeper intentionality behind tax led investing. When you use these strategies, and build wealth you can do amazing things with your money. The ventures you invest into can be other companies, other STARs just like you that are doing amazing things. I will bring some of these examples to life as we dive into the 3 strategies today, just to sprinkle some excitement into the mix.

Essentially tax-led investing can be one of the simplest ways for you to have a massive IMPACT and vote with every £1 you invest. If you’re frustrated by governments or huge corporations around the world not putting your agenda first…. Do something about it, invest into causes you know will drive your agenda. How you invest should be 100% bespoke to you and aligned with your mission and purpose in your life.

Lesson 1: The million pound impact of tax-led investment planning!

Tax-led investing is an essential tool that all entrepreneurs and people in business need to know about and implement on an ongoing basis if you are to hold on to all the money, time and energy you are already investing in creating a profit in your business or career, so you can hold on to and build your wealth over time. 

Tax-led investing gives you a very clear intention as to why you are investing your profit, and it can give you a means to have far greater impact in terms of reducing your annual tax burden, holding on to profit, extracting wealth from your business or career tax efficiently, protecting your business profits from unexpected consequences AND gives you the ability to have impact outside of your business into causes that you care about.

The simplest way to hold on to wealth in business is to fund your pension. For example, if you fully fund your pension with profits at £5,000 a month for 20 years, you will have held on to at least £11,400 in corporation tax at year, which over 20 years is £228,000 (note this is based on corporation tax at 19%, which is the starting rate until profits exceed £50,000 in the UK.) You will have saved £1.2 million into your pension before growth. If you achieve growth of 7% per annum on average annually compounded your pot could be worth £2.34 million!

Lesson 2: The 3 tax-led investment strategies entrepreneurs need to know about to hold on to profit!  

1. The ISA

When you’ve made your £1 and it is paid into your personal estate, you have paid both corporation tax and dividend tax, if you’re a limited company, or otherwise you have paid income tax. And these levels of tax are not insignificant.  

So on wealth that is to be held in your personal estate, for which you can access and spend freely if needed, you don’t want to pay any more tax. So a simple tax-led investment strategy is to invest using an ISA.

An ISA is an individual savings account. It is not just a bank account, you can invest into other assets like the stock market. You can add £20,000 a year into this account in the UK per person, and it means that the wealth you make or accumulate in your personal estate, you won’t pay any further tax on it. 

If you invest £20,000 a year of personal wealth into your ISA into a stock market investment which makes 5% per annum, your investment pot which you saved £200,000 would be worth £250,000.

When you access this pot, you don’t pay tax when you draw it down. Protecting the wealth you have made and paid tax on, so you don’t pay any more income or capital gains tax.

2. The pension

For wealth that you want to extract from your business, and shelter from corporation tax, or from income tax, or if you’re a high earner, and you want to build up a pot that is for your future you…. Then pensions are a no brainer.

You can invest up to £60,000 a year into a pension and get tax relief, if you have the earnings or income to match. Potentially more if you have carry forward available for the last 3 years.

But if you don’t need to spend the money you’re making, then why move money into your personal estate and pay tax on it.

Taking the same example of the £20k we put into an ISA…. let’s assume that we are instead funding our pension, and so saved an 40% in taxes, this would be subject to your personal circumstances, but to bring the example to life, we would convert the £20k a year into £33,333 a year, and make a similar 5% return.

In this example your fund would be worth £420,000. A significant uplift on the ISA due to gross roll up of your tax saving.

You do pay tax when you draw down on a pension, in the UK, currently you get 25% tax free cash and then pay tax on the remaining 75% of your pension fund at your marginal rate of tax at the time of accessing it.

However, your pension would usually be the last asset you drawdown on, because it is a fantastic legacy planning tool, under current legislation, your pension wouldn’t be taxed for inheritance tax, so if you had an ISA fund or other income and assets in your personal estate, you’d usually want to draw those down first.

3. The Venture Capital Investments

You don’t have to just invest in pensions to get tax relief at source. If you want to build up an investment portfolio, that gives you potentially even greater impact, and can create wealth for you in the present moment, then venture capital investing is a brilliant tax-led investment strategy for you to consider.

Today, I am going to highlight one type of venture capital investment, the VCT, venture capital trust. I want to highlight there are also other vehicles you can choose, but the purpose of this is to bring to life the differences that such investments can bring to you as an entrepreneur.

A Venture Capital Trust (VCT) is a publicly listed investment company run by a specialist fund manager. It aims to make money by investing in small, unquoted, entrepreneurial companies to help them grow. 

When you as a private investor buy shares in a VCT, you get exposure to a portfolio of small companies. The government is keen for experienced investors to invest in this kind of company, because they create jobs and support economic growth. 

However, investing in small businesses is risky. So to help compensate for this, the government offers generous tax benefits which include:

  • Up to 30% of income tax relief on your income tax bill when you invest in newly issued VCT shares 
  • Tax-free dividends – no need to declare VCT dividends on your tax return
  • Tax-free growth – no CGT on gains
  • And a generous annual allowance – you can invest up to £200,000 per tax year
  • BUT YOU HAVE TO HOLD FOR AT LEAST 5 YEARS FOR INCOME TAX RELIEF TO HOLD

Remember, tax rules can change and tax benefits depend on circumstances.

Lesson 3: Learn the 3 simple ways to wealth map your Six Figure business to build a million pound independence fund

The 3 simple ways to wealth map can be assessed, along with your personal attitude to investing (aka risk) is this:

  • Do you need money and flexibility now? Aka you don’t want to tie the capital up long term, you don’t want to wait until state pension age but you want your money to work harder than it does in cash. Then an ISA gives you that flexibility and shelters your money from further tax.
  • Do you want to invest for the longer term for your independence? Then a pension can give you tax relief in the present moment, and your pension can be accessed currently from age 55, soon to age 57 from 2028, 10 years before state pension age.
  • Do you want something in between? An investment that can build you a tax free income to enjoy now, with tax relief in your bank account today, but happy to lock away for at least 5 years your wealth to enjoy those tax reliefs, and take more risk with ventures you care about? Venture capital investing is a fantastic tool for soul led entrepreneurs to have massive impact.

My philosophy on this is that it isn’t a one strategy, we should adopt a diversified portfolio to make sure of all of our tax allowances and also to ensure we aren’t exposed to just one type of asset. 

Remember this is all about knowledge and financial empowerment. There is no financial advice in this blog, if you want coaching on how to map wealth or want a bespoke financial plan to be built for you by a Chartered Financial Planner, that empowers you to invest for yourself, then reach out.

Email me at hello@myindependentwealth.com for a 1-2-1 call or listen to the Wealth Unchained podcast where I dive into the topic of tax led investing in episodes 17 – 24.

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