8th December 2013
It has become increasingly difficult for wealthier people and high earners to manage their financial affairs tax efficiently. Despite the Chancellor’s Autumn Statement passing relatively painlessly, taxes have risen significantly in recent years. Patrick Connolly head of communications at Chase de Vere considers the options.
High earners have seen their personal income tax allowances removed, the implementation of a new top rate of income tax, the higher rate tax threshold frozen meaning more of their earnings fall above the basic rate tax band and increased National Insurance rates, plus the removal of Child Benefit for those earning more than £60,000 each year.
It is therefore especially important for individuals to make use of tax efficient wrappers, with pensions and Individual Savings Accounts (ISAs) providing the cornerstone of many peoples’ financial plans. However, even this is becoming more difficult.
We have seen the maximum amount which individuals can invest tax efficiently into a pension reduce from £225,000 to £50,000 each year and this will fall to £40,000 from next April. If you
save more you’ll have to pay a tax charge, although it is possible to carry forward any unused
allowances from the previous three years.
A potential double whammy is that the pension lifetime allowance, how much you can hold in pension schemes without facing a tax charge, is also reducing next April, from £1.5 million
to £1.25 million. These moves are forcing some people to look at either riskier or less tax efficient options.
There has been increasing demand for Venture Capital Trusts (VCTs) and, particularly, Enterprise Investment Schemes (EISs). Both benefit from 30% initial income tax relief plus tax free capital growth. VCTs also provide tax free dividends, which can be useful for those trying to supplement pension or investment income, while EISs allow capital gains tax deferral and can also provide Inheritance Tax savings.
However, while the tax attractions are undeniable, these vehicles typically invest in small unquoted companies. They should only be used by those who have a broad investment portfolio already in place and who understand and accept the risks.
Once appropriate tax efficient vehicles have been considered, for most people remaining investments should ideally be structured so they are subject to capital gains tax rather
than income tax. This may also mean holding income-producing assets inside tax efficient
wrappers and growth-orientated investments outside.
There are other, often fairly simple, ways to structure your investments tax efficiently. For example, we regularly meet clients where one partner is a high earner and the other isn’t. It is perhaps surprising how many of these clients are currently paying tax at the high earner’s rate on savings and investments rather than that of their partner. A simple transfer of assets between partners can sometimes make quite significant tax savings, as can also be the case when capital gains are made.
So, while many wealthier or high earning individuals are getting used to the prospect of paying more tax, there are a number of legitimate financial planning steps which can be taken to reduce this liability without attracting the unwanted attention of HMRC.