In the 2009 Budget, Chancellor Alastair Darling announced measures that hit anybody who earns more than £150,000 by introducing Additional Rate Tax at 50%. The measures are designed to make those who earn more contribute more to the repayment of the UK’s extraordinary debt levels. They include:
- a reduction in the personal income tax allowance for those earning more than £100,000;
- a 50% income tax band for those earning more than £150,000;
- Increase the basic 11 per cent national insurance rate to 11.5 per cent, and the 1.5 per cent paid on earnings above the upper earnings limit of £43,000 to 2 per cent
- limitations on the tax rebates available on pension contributions.
Taken together, this means that if you earn £150,000 or more you are paying an effective rate of tax of 52%!
What can I do?
Well, there are a number of things that you can do:
Take your bonus as a pension contribution
If you are entitled to a bonus in addition to your salary that will take you into the 50% tax band ask your employer about taking it as a pension contribution instead. It won't cost you any tax or National Insurance, and it could save your employer several thousand Pounds National Insurance too. See our Retirement planning page for how we can help.
Consider a personal pension contribution as well
Make personal contributions to a pension scheme. If your employer offers a pension scheme ask about making additional contributions in lieu of salary, known as "salary sacrifice". You might be surprised to learn that many employers will match additional contributions up to a certain level, so you may get a double benefit for your retirement pot.
Use the Enterprise Investment Scheme
The Enterprise Investment Scheme (EIS) provides huge tax breaks, especially if you have also made a capital gain (like selling an investment property or shares) in the 36 months before (or plan to in the next 12 months) by treating it as if it arises in the future. This enables you to plan when you pay the tax, perhaps saving it for when your overall tax bill is lower. You also get an immediate reduction of this income tax by 30% of the amount invested, and no capital gains or inheritance tax too. You can invest up to £500,000 in an EIS each year, or £1 million if you missed last year. EIS makes a very tax efficient investment, and can now be offered with lower risk investment strategies.
...or Venture Capital Trusts
Venture Capital Trusts (VCT), often called the "super ISA" is a simpler way of also getting up front tax relief on contributions of up to £200,000 a year. Claiming the relief is also simpler through the issuance of a certificate on making the investment. VCTs can provide a tax free income stream from dividends that can be used to provide an income in retirement to supplement pensions.
Max out your ISAs
Lets not forget the humble Individual Savings Account (ISA) that enables all investors to generate income and capital growth with no personal tax liability. Although contributions to ISAs are much more restrictive you can build up a sizable investment portfolio by using the maximum annual ISA allowance each year. Remember that the maximum contributions to stocks and shares ISAs is double that of cash ISAs and therefore much more useful.
Consider offshore pensions
Are you worried that your pension fund might exceed the Standard Lifetime Allowance (SLTA) limit costing you heavily in taxes on the excess fund? If so you should consider the option of transferring your pension offshore to a secure tax haven (Guernsey investor protection is as strong as the UK's) whe you can legally avoid unauthorised payment charges on death or if you exceed the SLTA. For larger pensions there are options that allow you to hold virtually any asset in a tax-efficient fund, even residential property.
Getting help
If you would like to find out more about the measures and start making plans to limit their effects, we can help. Whether it is through sophisticated tax planning, pension planning, or investment advice, we will take a close look at your financial situation and recommend solutions tailored entirely to your needs.
We have created an example showing how an investor with a portfolio of £1.3 million could, under current rules, generate an income of £63,075 per annum with just £7,050 Income Tax liability.
Contact us now to find out more
