Record numbers paying highest tax rate – three ways to protect yourself

We outline three ways tax bills can be cut down.

Official figures from HM Revenue & Customs (HMRC) show that a record number of people are paying the highest rate of income tax. 

The figures show 364,000 paid the 45p rate of tax on income over £150,000 in the 2014/15 tax year, up from 311,000 a year earlier.

Wage inflation for top earners has drawn more into the 45p tax net; another influential factor has been cuts to reliefs and allowances on pensions, which means taxable income is reduced by less.  The top threshold has remained frozen at £150,000 since 2010.

Below, Money Observer runs through three ways tax bills can be reduced. 

ISAS AND PENSIONS

The first port of call should be to take full advantage of Isa and pension allowances.

With pensions, the incentives are all upfront. The government gives tax relief at your highest rate on all contributions to a personal or work-based pension.

This is best for those who have paid a high rate of tax - 40 or 45 per cent taxpayers - because they get higher tax relief. It also means that more goes into the pot early, allowing investors to benefit from compounding for longer (providing their underlying investment goes up).

With Isas, all the benefits are on the way out, as contributions are made from taxed income but income and capital gains paid out are tax-free. The current Isa allowance stands at a generous £20,000, much higher than the £7,000 level in force when Isas were introduced in 1999.

VCTS

Venture Capital Trusts (VCTs) have grown in popularity in recent years, due to a reduction in both the lifetime allowance and the annual allowance for pension funds. In particular, since 2010/11 the annual tax-free allowance for pensions has been cut from £255,000 to £40,000, meaning that high-earning investors have had to find new tax-efficient investment avenues.

VCTs are high-risk investments, but investors are compensated by a number of generous tax incentives, including 30 per cent income tax relief (although this must be repaid if the shares are not held for five years) and tax-free dividend payments.

But while the tax breaks may be compelling, they shouldn't blind investors to the potential risks attached to the underlying assets. According to experts, VCTs suit investors who have already used other tax allowances, such as Isas.

VCTs are high-risk because they invest in fledgling businesses; but in order to smooth out risk, portfolios are diversified by investing in a range of such up-and-coming companies.

Figures published by the Association of Investment Companies show that the VCT sector as a whole was up 82 per cent in terms of share price total return over the decade to 31 December 2016; the tax benefits are on top of that.

JOINT OWNERSHIP

Thinking as a couple rather than as two individuals, you may be able to cut your tax bill further. One way to trim your tax liability is to own assets such as a buy-to-let property jointly.

You can then use both spouses' capital gains tax (CGT) allowance of £11,100 each when you come to sell.

Richard Morley, a tax partner at accountancy firm BDO, says: 'There's no point in one person paying tax on gains above their CGT allowance when the other is not using theirs. Joint ownership of assets can help to reduce CGT at the higher rate to the basic rate.'


Subscribe to Money Observer magazine

 

Comments

Post new comment

The content of this field is kept private and will not be shown publicly.
By submitting this form, you accept the Mollom privacy policy.