How To Reduce Tax

People who are lucky enough to be high earners may be in for a surprise when they

open their pay advice packets as the new 50% income tax rate comes into force in the UK.

This increase was announced in the budget in April 2009 so some people have already prepared for this rise but equally many others will not have taken positive planning steps.

These delayed tax increases are a kind of a stealth tax as when they are announced they do not come into effect and so people do not immediately feel there impact in their pocket. However a year later the tax increases begin to bite and take their effect. By that time many people may have forgotten the stealth tax increase that was introduced in legislation a year earlier.

Also many people exist in a state of denial until they actually feel the reduction in their net pay.

This form of a delayed stealth tax has been a characteristic of the Labour Government with Gordon Brown firstly as Chancellor of the Exchequer and then as Prime Minister.

It is never too late to be prepared to take some action to reduce the impact of these tax increases and there are some basic ideas that many people can implement to improve their tax position.

A very simple idea is to transfer assets between spouses where one is paying tax at a lower rate. For example any dividend paying investments or say a holiday or property investment income could be transferred to the partner who is paying at a lower rate of income tax.

Even if it is that both partners in the marriage or in a civil partnership were paying tax at 40% one may now have been elevated into the higher 50% tax rate bracket so that the lower tax payer should hold the income producing assets in their name.

Another simple planning idea is to invest in investments that pay a capital return as opposed to income.

This way the profit on the investment is taxed, at a lower rate, as a capital gain as opposed to income.

There are various investments that produce capital gains such as stocks and shares commonly known as equities and then there are unit trusts, investment trusts, hedge funds and other products.

The rate of capital gains tax is 18% compared to the top rate of income tax of 50% so you can see that there could be quite a saving.

However with a change of government imminent these rates could be changed.

The Liberal Democrats have suggested that they would make these rates the same. Both Labour and the Conservatives may also review this but neither has made any firm commitment either way.

I would still imagine that for any higher rate tax payers this would be a good idea.

Even if tax changes are implemented it could apply for a higher band so perhaps capital gains up to say 10,000 would still be at the lower rate which would still give a possible saving of 3,200 for a 50% tax payer and a healthy saving of 2,200 for a 40% tax payer.

The other simple idea is to make sure that you use up the tax free allowances that are available like the Individual Savings Accounts known as Isas. This year 10,200 can be invested and the Income is paid free of Income Tax.

by: Peter Jones

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