From 6th April 2010, all individual income in excess of £150,000 is subject to income tax at 50%. Added in the additional 1% of National Insurance this will mean that high earners are paying more than half of their income above £150,000 to the Treasury.
There are several legal methods to minimise exposure to the higher rate.
If you are a Director of your own company or sole trader
– consider employing your spouse in the business if their top rate of income tax is less than 50%. By paying them instead of taking income from the business yourself, this means that they will pay income tax at 0%, 20% or 40% depending on their own personal situation. Remember that they need to actively work in the business, have a contract of employment, and be paid above the minimum wage.
– Speak to your accountant (or us) to consider the advanced tax planning options that we spoke about in Tax tip 1 “How to understand the four types of tax planning”.
If you are employed (these rules apply if you are a Director of your own company/sole trader as well)
– Consider making gift aid payments to extend the banding at which you pay tax at the basic rate of 20%. Some leisure attractions such as zoos give you the option to make a gift aid donation rather than pay the standard admission. Remember that if you sponsor a colleague or family member for a charity race etc then the value of your donation can included as a gift aid payment
– Consider increasing your pension contributions and claim tax relief for contributions made at your 40% or 50% income levels. Speak to your IFA to ensure the current pensions rules allow you to do this. If you don’t have an IFA then we would be happy to refer you on to one of our trusted associates.