Tax efficient planning for high earners (those earning in excess of £150,000pa)

The need for more tax revenue

The Government and any future Government will need to raise increasing amounts of tax revenue.

We have already seen in Alistair Darling's budget of 22 April 2009 a move in the direction of taxing high earners - 50% income tax on those earning in excess of £150,000pa from 6 April 2010 as well as the reduction of the personal allowance for those earning over £112,950 to zero. It's possible there will be more moves in the same direction.

Doing things tax efficiently will become more important

Back in the 1970s we saw that when taxation on higher earners becomes penal, those individuals seek ways to reduce their tax bills.

Tax efficiency becomes of paramount importance - protecting your wealth not only from investment risk but also from the depredations of the tax man.

Why Killik Chartered Financial Planners?

We are a firm of Chartered Financial Planners which we believe is the new gold standard of financial planning.

We work with our clients to produce bespoke financial plans which aim to maximise tax efficiency as well as meeting the clients' risk profile.

What options are there for someone earning in excess of £150,000pa?

1. Pension Contributions - these can and do still make sense.

If you're making regular (monthly or quarterly) contributions, tax relief at your highest marginal rate is still available.

Even if you've been used to making one-off contributions, or maybe not contributed to a pension before, you can still make use of what is called a "special annual allowance" of £20,000 gross for both 2009/2010 and 2010/2011. Again you will receive tax relief at your highest marginal rate (40% in 2009/10 and 50% in 2010/11).

It might be possible for this to be as much as £30,000 gross depending on your pension contributions over the last three years.

2. Reducing your earnings below the £150,000 50% income tax threshold (in 2010/11 tax year)

In certain circumstances it may be possible to use gift aid or a pension contribution or a combination of the two to reduce your taxable earnings below the critical £150,000 threshold meaning you continue to pay tax at 40% not 50%. Your pension contributions will still benefit from tax relief at your highest marginal rate.

3. Venture Capital Trusts

Use Venture Capital Trusts for 30% income tax relief. VCTs are quoted collective investment vehicles and were designed to encourage saving in small companies by offering significant tax advantages:

• 30% income tax relief
• No tax on dividends or capital gains
• Must be held for 5 years
• Capital at risk - no guarantee although low risk investments are available.
• Wide range of investment choice

4. Use Offshore Bonds to benefit from gross tax free roll up:

• No tax income or capital gains tax whilst funds invested within the offshore bond
• You can draw up to 5% of the initial investment each year without incurring any liability to income tax even if you're based in the UK.
• No reporting requirements to HMRC
• Very wide investment choice
• Because income tax liability is not incurred until you either wholly or partially surrender the Offshore Bond (which means taking out more than 5% pa of the initial value) then this can be very useful for high earners who are paying tax at 50% (2010/11) or 40% but at some point, often retirement, only going to be paying 20% or 40%.
• Useful too for those working offshore or who intend to retire offshore.

5. Enterprise Investment Schemes (EISs) can be useful to defer Capital Gains Tax and benefit from 20% income tax relief.

• These are direct investments in unquoted companies which meet certain criteria and must be held for at least three years - they benefit from:
  • 20% income tax relief
  • Deferral of CGT liabilities
  • They are free of Inheritance Tax (IHT) after 2 years
  • The capital is at risk although there are some which maybe regarded as low risk.

To benefit from some or all of the above ideas and to find out of they are suitable for you, it makes sense to take good financial planning advice.

For a free initial meeting or a discussion over the phone, please call Lee Smythe on 020 7337 0432 or email lee.smythe@killik.com