But we already know that a lot more tax is going to be taken from higher earning UK residents because of the late April Budget. But people are only waking up to those tax promises as the new tax year 2010-2011 gets closer.
For starters, anyone earning more than £100,000 gross FROM ALL SOURCES OF INCOME will progressively lose their personal allowance of currently £6,475 on the basis of £1 of allowance lost for every £2 of income over £100,000. This means that individuals pay a marginal rate of tax of 60% between £100,000 and £113,950.
But is that going to be the highest rate of tax payable from next year? The answer is NO! And it could even be higher than the 98% marginal rate of tax payable by wealthier residents before Margaret Thatcher became Prime Minister. Then there was, I seem to remember, a top-up tax charge of 15% on investment income.
A much higher rate of tax will happen from 6 April 2011 when tax relief on pension contributions is restricted to people with taxable incomes of £150,000 or more. Between that figure and £180,000, tax relief will be tapered down to just 20%. In fact there are already anti-forestalling provisions so that individuals with personal pensions cannot push up their pension contributions above £20,000 a year or in certain circumstances £30,000 a year. So how can a higher paid UK resident get round these rules? Not surprisingly, the tax avoidance industry is in overdrive at the moment particularly as not long ago the current Government reduced the top rate of tax on capital gains from 40% to 18%. So there are a lot of eager beavers trying to convert income to capital appreciation.
I will keep you abreast of what is going to be on offer but three front runners are likely to be:-
- Employee Benefit Trusts on or offshore;
- An explosion in share options;
- Our old friend the Enterprise Zone Trust.
But what can you do to plan for higher taxes from April 2010? It is certainly simpler if you are married and have a non-working spouse or one who only earns a small amount of money. To them (at least in tax terms) should be switched all cash holdings and any investment paying interest or dividends. Don’t think that just because you run a small business and pay your self dividends to keep the current tax take low that you won’t be caught be these new rules; they cover all sources of gross taxable income. Specifically, ISAs become more attractive as they produce income on which no more tax is payable. Another candidate for renewed interest is the good old single premium life assurance bond both onshore and offshore. The “income” that they pay out is deemed to be a return of capital.
And there is certainly one area that investment bonds (preferably offshore versions as long as charges are not too high) will score and that is in paying childrens’ university fees. Under a fairly recent ruling, if an investment bond is assigned to somebody over the age of 18, the person over the age of 18 controls the bond (or at least the units assigned) and can cash it in. If they do cash it in then any growth achieved on the bond will be their income for tax purposes. And because they are entitled to a personal allowance, there should be no tax to pay. In practice because students may earn taxed income during their vacations and during term time, it is probably best to assign the personal allowance-worth of investment bond - ie £6,475 currently to each student each financial year. That then gives them plenty of leeway to take on extra work.
Conclusions
If you are a higher earner currently earning close to or over £100,000 it is most important that you start looking at tax planning now rather than leave it to the last moment when it may be difficult to switch investments quickly enough to be prepared for higher tax starting next April.
As yet Defined Benefit pension schemes are not affected. Expect also a Budget in February.
