50% Income Tax Rate
August 24th, 2009 Investments, News, Observations, Retirement PlanningIn the budget the chancellor announced the introduction of a 50% tax rate for those with taxable earnings above £150,000. However the position is more complicated than this, as what was not made quite so clear was that there will in fact be an increased tax take between 40% and 42.29% for anyone earning above £100,000.
The additional tax will work as follows:-
For every £2 you earn above £100,000 you will lose £1 off your annual personal allowance. The current personal allowance stands at £6,475 (assuming no benefits in kind and ignoring any additional allowances for pension contributions) thus if you earn £112,950 (£100,000 + 2 x Personal allowance @ £6,475) you will lose your personal allowance altogether.
The impact this has on your personal tax position is outlined below:-
Position prior to budget change:-
Earnings £112,950
Personal Allowance £6,475�
Tax @ 20% £7,480
Tax @ 40% £27,630
National Insurance £4,889
Total deductions £39,999
%age tax and NI Take on gross Earnings 35.41%
Position from April 2010
Earnings £112,950
Personal Allowance £Nil
Tax @ 20% £7,480
Tax @ 40% £30,220
National Insurance £4,889
Total deductions £42,589
%age tax and NI Take on gross Earnings 37.7%
Reduction in take home pay £2,590pa or £215 pm
It is this additional 2.29% rise in income tax or £2,590 pa in actual terms that is likely to have a more profound impact on most higher earners income position in 2010 than the new 50% top tax rate, as most higher earners are earning between £100,00 and 150,000.
However if you do earn above the £150,000 level then the impact will clearly be even greater and as such additional tax planning could well benefit you.
What Can You do About it?
in the last 5 years the government has clamped down on a large number of tax avoidance schemes for higher earners but there are still opportunities for those who have capital to invest. These opportunities are now even more advantageous due to the very poor sub inflation returns (based on the Consumer Price Index) that most deposit accounts are returning. One such scheme allows the investor 20% income tax relief up front with a structure that is designed to return all the invested capital net of fees and charges after 3 years. It also allows for the deferral of any capital gains tax (CGT) liabilities that has been crystallised in the last 3 years giving the possibility of “arbitraging” on the CGT rate from 40% to 18%.It would work as follows:-
Higher rate tax payer’
Cost of investment in to the scheme £50,000
Less income tax relief (20%) £10,000 of the qualifying investment
Effective cost of investment £40,000
Estimated net exit proceeds £50,000
This is equivalent to the following:-
Net tax-free return £10,000
Net tax-free rate of return 7.7% p/a
Gross equivalent return 12.83% p/a*
*(to a 40% taxpayer if the £50,000 were invested in a deposit account instead)
WHAT WE HAVE ASSUMED
The annualised returns are calculated net of fees with an investment life of 3 years.
All tax benefits are used to reduce the effective cost of the investment.
The investment generates only enough returns to cover all fees.
The scheme is a recognised scheme by the Inland Revenue and as such qualifies for the tax advantages detailed above. The scheme however does have a degree of risk associated with it but it has been designed to mitigate this as far as possible. There is a risk however and as such this needs to be considered very carefully by any potential investor.
If you would like to know more about this scheme or any other tax planning opportunities please contact the Directors at Baxter Fensham ltd.
This type of scheme is not suitable for all investors and you may get back less than your original investment.
