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August Questions and Answers

Newsletter issue – August 2026

Q: I've heard that making charitable donations can increase my tax-free Personal Allowance. How does this work, exactly?

A: At a time when frozen tax thresholds are pulling more people into higher tax bands, people can effectively increase their tax-free Personal Allowance by using HMRC's 'four times' Gift Aid rule. By reducing the impact of fiscal drag, you can earn more before paying income tax.

You can increase your tax-free allowance by reporting charitable gifts, including items donated to charity shops that are sold under Gift Aid. Crucially, your donations must not be worth more than four times the amount of tax you paid in that financial year.

Once you've made a Gift Aid declaration, your basic and higher rate tax bands are extended by the gross charitable donation, thereby increasing the proportion of your income taxed at the lower rates. For example, if you're a higher rate taxpayer (40%) and you donate £100 to charity, your basic rate band is extended by £125. That £125 of income that would have been taxed at 40% is now taxable at 20%.

Q: How does investing in an Enterprise Investment Scheme help to reduce Inheritance Tax exposure, now that pensions are going to be included from next April?

A: From April 2027, inherited pensions will be included when calculating inheritance tax (IHT) bills. Previously, pensions did not form part of an estate for IHT purposes, allowing many families to pass them on tax?free. This change means people with large retirement savings must rethink estate planning to avoid higher tax exposure.

One option increasingly being considered is the Enterprise Investment Scheme (EIS). This is a government-backed scheme supporting small companies by offering tax incentives to investors who buy new shares. Companies must have fewer than 250 employees and gross assets under £30m at the time shares are issued, to be eligible.

Investors receive 30% income tax relief on any money they put into an EIS. There is no Capital Gains Tax on profits made from an EIS. Most importantly, EIS shares can qualify for IHT relief. They must be held in companies that meet business relief requirements (relief for IHT purposes is capped at £2.5m) and must be held for at least two years at the time of death. Anything above the £2.5m threshold is taxed at 20% rather than 40%.

Please get in touch with us if you would like to find out more about the EIS.

Q: As a self-employed owner of an SME, what is the most tax efficient way for me to pay myself?

A: Whether to pay yourself through salary or dividends remains one of the most important tax-planning decisions for SME owners. It can have a big impact on your tax bill and overall financial resilience.

Without knowing the details of your business set up, we can look at both options to help you decide which is best for you.

Salary is subject to income tax and national insurance; the amount taken determines whether you fall into the 20%, 40%, or 45% tax bands. Employer NICs have become more expensive: from April 2025, employers pay NICs at 15%, increasing the cost of higher PAYE salaries. Salary costs reduce your profit and thus corporation tax payable.

Dividends are paid after corporation tax on company profits, are not subject to national insurance and have lower tax rates than salary: 10.75% (basic rate), 35.75% (higher rate), 39.35% (additional rate). The dividend allowance has been reduced over recent years to just £500, making dividends less attractive than before.

A common approach is to use a hybrid of both options: Take a salary around the personal allowance (£12,570) and supplement the rest of your income with dividends. This aims to balance tax efficiency with access to state benefits and pension contributions.

Please do get in touch to discuss your options further as there are other aspects to take into consideration.