14 ways to beat the 50% income tax rate
Updated 6th July 2011
Money tip #56.
Anyone with an income of more than £150,000 a year will now be taxed at 50% on income and 42.5% on any dividend income. But there are a few legitimate ways in which you could beat the new 50% rate and reduce your tax bill.
How to beat the 50% tax rate:
- Equalise income between you and your spouse - If your spouse pays lower or indeed no income tax move income producing assets (including bank accounts – see Money tip#1) into their name. The income will then form part of their tax assessment so reducing your tax bill. It will ensure that your spouse’s personal annual tax-free allowance is used and any tax due is charged at a lower rate.
- Utilise your ISA allowance (and that of your spouse) – see Money tip #22 – Use your annual ISA allowance.
- Utilise your annual Capital Gains Tax (CGT) allowance (and that of your spouse) – see Money tip #55 – Use your annual CGT allowance, If you are taking an income from your investments make sure you use your CGT allowances as it could provide you with £21,600 tax free each tax year.
- Consider generating capital gains rather than income – particularly when looking at your investments. Currently the CGT rate is just 28% (for high rate tax payers) compared to your 50% income tax rate.
- If you are self employed control your income and put your profits back into the business– and ensure you are not taxed at 50% by keeping your income below £150,000. In the long run you may benefit as an eventual sale of your business will be taxed as a capital gain. Genuinely trading companies can also claim entrepreneurs’ relief which is taxed at 10%.
- Owners of profitable small unincorporated business could benefit from transferring their business to a limited company - Corporation tax at rates of between 20% and 26% would then be payable on profits retained in the business, rather than higher rates of income tax.
- If you are employed consider going freelance – in this way you can control your earnings and claim tax deductions against income. High-income earners are quitting their jobs to become self-employed consultants, which allows them to set up businesses that pay the small companies rate of tax at 20% for turnover of less than £300,000.
- Get paid in shares – the eventual share sales will be subject to CGT potentially saving 23% in tax and National Insurance. But beware any dividends will be taxed at 42.5%.
- Consider taking part in employer share schemes – these schemes will reduce your taxable income, in exchange for shares under the scheme rules, and you will only be liable to CGT when you decide to sell the shares. (the diretgov website offers further info – click here).
- Consider salary sacrifice – this excellent article form The Times tells you all you need to know about the benefits of salary sacrifice.
- Make pension contributions – these can reduce your tax bill while at the same time saving for your retirement but be careful, anti-forestalling legislation limit the amount you will be able to contribute into pensions. See my Money tip #32 – Pay into a pension.
- Make pension contributions on behalf of your spouse and children via stakeholder pensions – You can invest up to £3,600 a year into stakeholder pensions for each of them, even if your spouse and children do not earn anything. Since basic-rate tax relief is available, each contribution of £3,600 will cost a high earner only £2,880.
- Consider tax incentivised investments such as Enterprise Investment Schemes (EIS’s) and Venture Capital Trusts (VCT’s). These offer generous tax breaks upon investment but are very high risk. Other investments you may consider are zero-dividend preference shares as they do not provide dividend income but instead roll up to an eventual capital gain, hopefully. But a word of warning, never make an investment for tax reason alone. I’ve personally seen people badly burnt by doing so. Read my post Money tip #26 – Never make an investment just for tax reasons. However National Saving & Investment Certificates offer tax-free returns and are among the safest investments out there. These are often over looked by investors but they can also offer a way of protecting your savings against the threat of inflation. (see my post Money tip #30 – One way to protect your savings from inflation, both tax and risk free).
- Seek advice from a financial adviser and a tax specialist – if you are contemplating mitigating income tax you should seek expert advice as not all the ideas above are suitable for everyone (they are for information purposes only). Also, remember that the tax regime is always subject to change so bear this in mind before you start making wholesale changes to your finances. And one last point, HMRC are likely to be particularly vigilant as they know high earners are going to do everything they can to mitigate tax. So beware of schemes or investments marketed to mitigate the 50% tax rate as HMRC could attack these in the future.
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