Tax Saving

The 2009 Budget contained proposals for quite draconian tax increases particularly for those earning £100,000 + who lose their annual tax allowance at a rate of £1 in every £2. Pension tax relief will also be restricted for higher earners from 2010 when those with income of £150,000 + will effectively only receive tax relief at the basic rate in addition to suffering a 50% top tax rate of excess income. However, this has been tempered by the simpler and more generous capital gains tax allowances that benefit all taxpayers. Our 2009 Guide to The Capital gains exemption illustrates how capital gains taxes and exemptions can substantially reduce the tax burden here

Higher Rate Taxpayers

On the one hand you are to be congratulated for your enterprise, on the other the Inland Revenue is, and will always, be looking for ways to claw back the fruits of your enterprise. The 2009 Budget demonstrates this in spades as the following illustrates.

Budget Proposals 2009/10 - Higher earners and higher rate taxpayers.

Our Main Concerns:

From 2010 all taxpayers with earnings over £100,000 will lose their annual tax allowance by £1 in every £2 – as the current tax allowance is worth £6,475 (2209/10 and usually subject to annual increases) this means that those earning £112,950 will lose 100% of their allowance culminating in a possible £2,590 or £3,237 additional tax charge for 40% and 50% tax payers respectively.

From 2010 all taxpayers with earnings over £150,000 will lose all of their annual tax allowance AND be subject to a new 50% tax band on their excess income! In addition Tax Relief is to be restricted on pension contributions on those earning over £150,000 for more click here

Possible Remedies

The following is a short list of possible solutions to avoid these additional tax charges the list is not exhaustive and is arranged to suit those with high investment income dragging them into higher rates of tax (1-3) and those with high earned income that cannot control how income is provided (4-5) if you wish to be provided with further information please contact us here

1. Insurance Bonds (both Onshore & Offshore) enable regular withdrawals of up to 5% per annum for up to 20 years that are not tax accountable and therefore avoid the proposed annual tax charge. See more here
2. Whilst income tax rates have accelerated Capital Gains Tax has fallen substantially and is now the most efficient tax to pay – a £10,100 annual tax-free allowance is available and the balance of gains elected to be taken is taxed at only 18%! See our free Capital Gains Tax Guide 2009 here
3. Stocks and Shares ISA’s are now able to accept £10,200 per annum after October 6th 2009 for those over 50 years of age and as of April 2009 for all eligible investors – investors should take full advantage of this - also it is now possible to transfer cash ISA’s into Stocks & Shares ISA’s but not vice versa. With interest rates so low this may be attractive to many although investors should be aware of the different risk profiles prevailing that will of course be dependent upon funds selected.
4. Enterprise Investment Schemes (EIS) : 20% upfront income tax relief - Investors receive tax relief of 20% of the amount invested, up to £500,000 per year, against their income tax bill for this year (or the last tax year, if you choose). For example if you invested £1 million this year, you could receive 20% income tax relief on £500,000 this year, and an additional 20% income tax relief for the other £500,000 against last year's income tax bill, resulting in a total of £200,000 tax relief. CGT payable on other investments may be rolled over into the EIS and deferred for the life of the investment - Investors can defer gains made up to three years previously. Deferring previous gains enables investors to use any future potential capital losses to offset previous gains. Your investments in these funds are usually sold after three years, allowing you to release your capital free of CGT where new capital was invested. Or you can roll it over into a new EIS - and receive a further 20% income tax relief. Any losses incurred are usually able to be offset against income tax - this provides an attractive tax incentive to combat the higher risk usually associated with EIS. After 2 years the EIS holding is free of Inheritance Tax thus providing a further Tax Incentive and a potential saving of 40% of the then value.
5. Venture capital trust (VCT) A VCT is a company which has been approved by HMRC and which subscribes for shares in, or lends money to, small unquoted companies. A VCT will invest in a spread of small unquoted companies, with investors in a VCT enjoying 30% income tax relief on VCT subscriptions up to a maximum of £200,000 each year, applied as a tax reducer. No CGT on disposal. The income tax relief at 30% is available to be set against any income tax liability that is due in the year of subscription, whether at the lower, basic or higher rate. However, tax relief will be limited to the amount which reduces the investor's income tax liability to nil. The amount of VCT income tax relief claimable by an investor could be reduced by any other transaction that effectively benefits from income tax relief, such as a pension contribution or gift aid payment, as both result in an automatic reclaim of basic rate tax by either the pension provider or respective charity. Tax credits on dividends are not repayable, and investors should take this into account when considering their investment in a VCT. Needs to be held for a minimum of 5 years for income tax advantages VCT shares do not qualify for business property relief from inheritance tax.