by Tim Gul
In this issue our regular columnist, Tim Gul of the St. James’s Place Partnership, looks at the options that are available to high earners in easing their tax burden. To receive a free guide covering Wealth Management, Retirement Planning or Inheritance Tax Planning, produced by St. James’s Place Wealth Management, contact Tim Gul of the St. James’s Place Partnership on 0794 929 3323 by email
tim.gul@
sjpp.co.uk or visit
www.sjpp.co.uk/timgul
There’s no escaping it - taxation is lurking around every corner. The economy has been going through fiercely challenging times, and now we all have to pay for the remedies. While high earners will bear the brunt of new taxation measures, the middle income bracket will also be in the line of fire from next year.
Those on higher incomes are likely to see their personal wealth impacted through increased tax liabilities. From April, those with incomes over £150,000 will have to share their income over this level on an equal basis with HM Revenue & Customs (HMRC) though their income tax liability. Higher earners, therefore, are looking at ways to ease their liability. And by carefully working out lifelong cash flow requirements, it is still possible to maintain a desired lifestyle and sustain wealth during retirement - with careful planning.
There remain a number of tax mitigating solutions that are worthy of consideration. Retirement planning is one, and setting aside funds for retirement is critical for everyone - and you can still make the most of your pension as a tax efficient investment. Even if you have tax relief restricted to 20%, pensions can still be the most effective way of investing for retirement, even if you are likely to be a higher rate tax payer when you retire.
Salary sacrifice is a tax efficient way of increasing your pension contributions and keeping most of what you earn.
Changes in the way HMRC treat salary sacrifice have made salary sacrifice more attractive particularly to those with total income under £130,000. If the employee waives the right to receive part of their salary or bonus then the portion that is waived is no longer treated as earnings and therefore not subject to Income Tax, or National Insurance Contributions.
However, as pension contributions start to become less tax efficient for higher earners, other options can be explored. High earners can maximise their contributions to ISAs (Individual Savings Accounts), for example.
ISAs represent the most tax-efficient way to save and invest for the future. And their tax efficiency and flexibility has even greater value as taxes rise across the board. They are easily accessible, withdrawals are paid with no tax liability, they are a useful short or medium term account for cash, and offer an easy route to the equity markets. And from April, the annual ISA allowance increases from £7,200 to £10,200 for all eligible investors. The full allowance can be invested in a stocks and shares ISA or alternatively, up to £5,100 of the allowance can be saved in a Cash ISA.
Other tax-efficient savings vehicles include VCTs (Venture Capital Trusts) and EISs (Enterprise Investment Schemes). These exciting investment opportunities can offer significant tax benefits, such as Income Tax relief, tax free growth, deferral
of Capital Gains Tax (CGT) and tax relief when funding for retirement and Inheritance Tax mitigation after two years.
High earners should also consider carrying out a review of tax arrangements, making sure that any investments are held in the name of the lowest taxpayer, and set up trusts to make sure income is passed to other family members. In addition, anyone planning to surrender a life insurance policy should consider doing so before 5 April while the top tax rate is still 40%. Additionally, consideration could be given to deferring claims for income tax relief until April 2011 when the relief will be available at 50% instead of 40%. And if bonuses or dividends can be taken before 5 April, these will be taxed at the current lower rate.
Getting the right financial strategy and solutions in place is no easy task for time- hungry high earning executives, and the financial goals of every individual are different. But with energies naturally focussed on business matters, postponing personal finance decisions at this particular time could have a detrimental effect. The financial needs of people who have created more capital or who earn higher incomes than average are invariably more complex than most. A personal wealth management service with a trusted specialist helping to understand and explain the issues, as well as propose bespoke solutions, will go a long way to help high earners remain as tax efficient as possible.
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