High earners are being advised to invest for capital growth rather than income for the next two years, following confirmation in this week’s Budget that the 50 per cent top rate of income tax will be temporary.
Wealth advisers now expect the 50 per cent tax rate to be scrapped in 2013, after George Osborne, chancellor, said on Wednesday that the tax would do “lasting damage” to the economy if it became permanent.
Investors are being urged to consider managing their finances so that they receive as little taxable income as possible until the rate is scrapped.
“You could batten down the hatches if it suited you,” said Kevin Custis, a director at Rathbones. “Look at having investments that don’t yield so much but have better prospects for capital growth.”
High earners are also being urged to top up their pensions as much as possible in order to benefit from 50 per cent tax relief. From April 6, people will be able to pay up to £50,000 a year into their pensions with income tax relief at their highest rate – meaning that, for those earning above £150,000, the net cost of a £50,000 pension contribution would be just £25,000, compared with £30,000 for those on a 40 per cent tax rate.
High earners are already set to pay hundreds of pounds more in income tax and national insurance (NI) in the new 2011/12 tax year.
And while most 40 per cent taxpayers stand to benefit from the increase of £630 in the personal allowance for 2012/13, accountants Grant Thornton said that people earning over about £108,000 face being worse off because the chancellor narrowed the basic-rate tax band by £630. High earners have their personal allowances progressively clawed back over £100,000, while a narrower basic-rate band will result in more of their income being taxed at 40 per cent rather than 20 per cent. With the 50 per cent tax threshold remaining at £150,000, accountants BDO estimated that tens of thousands of high earners will also be drawn into the top tax rate in the next couple of years.