Technical Briefings
10 February 2010
Planning for 50% tax – what can be done for the employees
April 2010 heralds the arrival of a top rate of income tax in the UK of 50%, taking it to its highest level in 22 years. Moreover, the personal allowance is also being clawed back for those with income in excess of £100,000.
The previous two articles in this series have looked at strategies for taxpayers who have their own businesses. This month, we look at what can be done for employees.
Reducing taxable income
Employees have little control over their earnings, and so minimising the effects of the new top tax rate relies on using tax shelters or other tax-saving schemes.
Individual Savings Accounts (“ISAs”)
Every individual over the age of 16 can invest up to £10,200 in an ISA for the tax year starting on 6 April 2010, and this limit is expected to remain the same or be increased in future years. There are separate limits in the ISA for components relating to shares and cash. Income and gains are free of UK income and capital gains tax, and therefore ISA income does not count towards your £150,000 limit.
Capital Gains
At the moment, capital gains are taxed at a top rate of 18%. If you can arrange your affairs to generate capital gains rather than income, such as by investing in non-distributing OEICs, unit trusts, or low income/high growth shares, your investment return will normally suffer capital gains tax rather than be subjected to the higher income tax rates.
National Savings Tax Free Investments
The following are tax free, subject to National Savings Terms and Conditions, so income arising does not count towards the £150,000 limit:-
- Premium bonds (maximum investment £30,000)
- Index Linked Savings Certificates (maximum investment £15,000 for each issue)
- Fixed Interest Savings Certificates (maximum investment £15,000 for each issue)
- Offshore bonds and roll-up funds
These enable you to defer UK tax liabilities by choosing when to extract your funds. The running costs tend to be higher than for UK-based products and they are therefore generally only suitable where the funds will be invested for a reasonable period (say at least seven to ten years).
However, with the facility to withdraw 5% per year of the capital tax-free, bonds give the option of a reasonable “return” as well as allowing tax to be deferred until such time as UK tax rates drop again rather than suffering tax at 50%.
Venture Capital Trusts and Enterprise Investment Schemes
Although both of these provide tax relief on the initial investment as discussed in detail elsewhere in this edition of The Tax Factor, it is worth remembering that the investments do not count towards reducing taxable income when determining whether the £150,000 threshold for the withdrawal of pension tax relief is reached.
Sharing income around your family
The transfer of income-producing assets from one member of a family to other members will result in total income being spread around so that as few family members as possible exceed the £150,000 limit.
For transfers between spouses there are normally no obstacles, but the Revenue have tried to attack certain arrangements over the last few years, so care will need to be taken. Where assets are transferred to the wider family, there may be capital gains tax and inheritance tax issues to be considered, but with asset prices being relatively low at the moment, this may be an opportune time to undertake appropriate inheritance tax planning.
Charitable Giving
Higher rate tax relief can normally be obtained on payments made under Gift Aid (no minimum amount). The charity also gets a tax refund of 25% of the amount donated, plus a 2.8% supplement for all gifts made before 6 April 2011.
It’s also worth bearing in mind that payments under Gift Aid reduce income for the £150,000 limit for pension tax relief, as noted in Part 2 of this series, and can therefore play a very useful role in avoiding a claw back of that relief.