Accountant Chris Marshall looks at strategies GPs can use to pay less income tax
The tax burden for high earners has increased over the past year, with the introduction of the 50% tax rate for earnings over £150,000, and there is more pain to come with the proposed increase to national insurance rates from this April.
Those who fall into this new earnings category will experience several rates of tax applied to their income – from 20% through to 50%, and even an effective tax rate of 60% (with the loss of their annual allowance).
Higher rate taxpayers also have additional taxes applied to dividends, savings, capital gains, restrictions on pension contributions, and reduction or even removal of the annual allowance (initial tax-free earnings).
In this complex area it can be hard to see the wood for the trees. My aim in this article is to outline what you can do to manage your your investments and assets to reduce your tax liabilities.
1. Share the wealth
Gifting assets to a non-taxpaying spouse can help limit or remove the tax liability of an investment, with non-taxpaying individuals having a number of allowances that can and should be used.
Allowances, such as the personal allowance of £6,475 (tax-free initial income for under 65s), £10,100 annual tax-free capital gains allowance, as well as ISA contribution limits, and even pension tax relief.
In addition to this and as outlined above, gains or income above the annual allowances and limits may also be at a reduced rate to that of a higher or additional rate taxpayer.
2. Utilise pension contributions
Back in October (2010), the Treasury set out its new pension rules and legislation for the 2011/12 tax year. Thankfully, the outcome of this announcement was that a lot of the uncertainty surrounding the future of pension tax relief was removed.
Although we learnt of both the reduced annual and lifetime contribution limits in these announcements, the good news for investors is that tax relief will be at the highest marginal rate of tax. This means a basic rate taxpayer will receive 20% tax relief, a higher rate taxpayer 40%, and a 50% taxpayer 50% relief.
To clarify, as long as careful consideration to the contribution limits is adhered to, this is one way to reclaim the income tax paid, which can be put towards your future retirement provisions.
3. Maximise ISA contributions
Individual Savings Accounts (ISAs) provide a fantastic solution to fulfill a future capital need without incurring capital gains tax on investment gains made. Furthermore, the news gets even better because the ISA limit will increase in April 2011 by £480, raising the maximum annual ISA contribution to £10,680.
4. Use of alternative investments
If you are a more adventurous investor, the use of alterative investments such as Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs) can provide tax savings and shelters in multiple forms, from reducing income tax to offsetting Capital Gains Tax liabilities.
Both EISs and VCTs provide tax-relief that can be offset against the investor’s tax bill, with EISs providing 20% tax-relief and a higher rate VCTs 30%, providing, of course, the shares are held for the qualifying period of three and five years respectively.
In addition to the generous tax-relief available in the earlier years, other available tax relief options under qualifying schemes are Capital Gains Tax deferral (EIS), tax-free dividend income (VCTs) and up to 40% loss relief on any holding that falls in value (EIS).
5. Capitalise on your losses
If any capital losses have been realised on personal investments you can claim these losses against any gains realised in the same tax year. Even if there are no capital gains, or if your total combined capital losses for the year exceed the total capital gains, the difference between the two is the loss available to carry forward to future years.
This is by no means an exhaustive list of possible choices. However, my aim is to show you that by selecting carefully considered and properly implemented investment options you can help reduce your tax liability. As with any new financial investment or strategy, it is imperative you seek professional advice to ensure it is suitable.
Chris Marshall is an independent financial advisor specialising in providing financial planning and advice to the medical profession with Arrow Financial Services. For further advice and support, please contact Chris on 01244 322330 or via email firstname.lastname@example.org.
What are the new tax rules for higher and additional rate taxpayers?
• The new additional tax rate is applied at a rate of 50% for income over £150,000 from 6 April 2010
• There is a phased elimination of personal allowances reaching zero for those with incomes exceeding £112,950
• Directly held company shares may give rise to a further tax liability with dividend income. This is taxed differently depending on tax status, with non-taxpayers having 10% tax liability, basic 20%, higher rate taxpayers 32.5%, and additional rate taxpayers having a total tax liability of 42.5%
• Capital gains realised from non-business assets can be mitigated with an individual’s Capital Gains Tax (CGT) allowance, currently £10,100 pa. After this allowance has been used, CGT will be applied initially at 18% for non-taxpayers or basic rate taxpayers, and 28% for higher and additional rate taxpayers
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