High earners left with few ways to avoid 50% tax

High earners hoping to escape the punitive new tax rules introduced in the Budget have few ways to turn, advisers have warned, as the government has introduced sweeping legislation to block most loopholes.

From next year, anyone with a total income of more than £100,000 will face a higher tax bill. Hardest hit will be those earning over £150,000, who will be caught in a new tax band of 50 per cent. This group will also see their ability to claim tax relief on pension contributions restricted (see below).

Accountants said wealthy clients were already hunting for ways to sidestep the new rules. One option is to bring their total income – share dividends, rental payments as well as earnings – below the new thresholds. Those hit by the new 50 per cent tax rate, for example, could reduce their income by handing assets such as share portfolios and properties to lower-earning spouses.

But the introduction of strict “anti-forestalling” measures means that for many wealthy people, higher taxes will be unavoidable.

“People have to be very careful not to fall foul of the anti-avoidance rules on pension contributions,” said Richard Mannion, national tax director at Smith & Williamson, the adviser. “The government has brought in some draconian measures to prevent individuals escaping the higher taxes.”

Advisers have urged those earning more than £150,000 to maximise contributions to their pensions both this tax year and next to benefit from full tax relief before it is capped at 20 per cent. But unless pension contributions made from now on follow the same pattern as in recent years, the lower tax relief will already apply.

“If investors have been paying regular contributions into their pension, they can continue to do so, but if not, they won’t be able to start now and gain the full tax relief,” said Andrew Tully, senior pensions policy manager at Standard Life.

There are also measures to stop high earners setting up new salary sacrifice schemes, which would allow them to replace a proportion of their earnings with other benefits such as company shares or pension payments.

“If something was in place before the Budget it can stand but those earning over £150,000 can’t do anything new,” explained Tully.

Salary sacrifice schemes could still be a good option for people earning £100,000- £150,000 who will lose their personal tax allowances from next year but will not be hit by the lower pension tax relief. If they can bring their salary below £100,000 and take a larger pension payment instead, they would still qualify for tax relief on their pension contribution and keep their personal allowance intact. Those earning £100,000-£112,950 could avoid paying a marginal tax rate of 60 per cent.

Lower relief for lump sum pension contributions

Self-employed workers, partners and company directors who make annual lump sum pension contributions can now only get 40 per cent tax relief on the first £20,000 – while employees continue to benefit from full relief on 10 times that amount, writes Matthew Vincent.

In this week’s Budget, the chancellor tapered down pension tax relief to 20 per cent for those earning more than £150,000 from April 2011. But to prevent high earners making large contributions with 40 per cent relief before then, he also introduced “anti-
forestalling” measures that limit the amounts eligible for the higher relief to “normal ongoing regular pension savings”, or £20,000 a year, whichever is higher.

“Normal contributions” are defined as those made in a monthly or quarterly pattern, and exclude the annual contributions typically made from profits or bonuses by partners in law and accountancy firms, directors and the self-employed. So these investors will be restricted to the £20,000 limit. Employees already paying monthly or quarterly are not affected and so can continue to contribute the full value of their salary up to £245,000, with 40 per cent relief.

“Anyone doing regular contributions is better-off under the current measures than anyone who pays in less than quarterly – it’s like saying Christmas is no longer regular,” said Greg Limb, partner at KPMG. John Whiting of Pricewaterhouse-
Coopers said: “The Revenue needs to frame rules that allow the same relief to someone who gives a regular annual commitment”

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