How to cope with higher tax rates

The April Budget brought bad news for high earners, but there may be ways to mitigate the pain.

The Chancellor's proposals for income tax and national insurance contributions included a higher tax rate of 50% for income over £150,000 and a gradual phasing out of personal allowances where income exceeds £100,000. Both changes apply from April 2010. Worse, he announced a 0.5% increase in national insurance rates from April 2011, together with an increase in the upper earnings limit and restrictions on tax relief for pension contributions where income exceeds £150,000. Although this, too, begins in April 2011, transitional restrictions apply immediately.

If your income is between £100,000 and £112,950, the combined measures mean a marginal tax rate of 60%. This will rise to 61.5% for earned income after the national insurance increases.

Income reduction options

If you're caught by these changes it's likely you'll be looking for ways to reduce your income and perhaps take advantage of the lower 18% capital gains tax rate. Emigration may seem tempting for some, but recent court cases have shown it's far from easy. Spreading income around the family could be an option but there are obstacles here too.

You could try reviewing your investment strategy either to invest for capital growth rather than income or to use bond wrappers rather than direct investment to control the amount that is treated as income. Alternatively, your employer could improve the lot of high earners by introducing employee benefit trusts or certain types of share option schemes.

To discuss how you can lessen the impact of tax rate increases, contact your usual Littlejohn tax adviser or email tax@littlejohnllp.com