The Smart Frog remembers back to the day when he was but a tadpole squating around the monopoly board wishing he was aboard the battleship. But, alas, he always seemed to be bankrupt by the end of the game by continually landing on the space between Park Lane and Mayfair and collecting a whole lily-pad of Super-Tax debts.
This blot on his wonderful youthful days has come back to haunt him in the form of the aforementioned Super-Tax being introduced in real-life. In real-life in the UK, next April, to be precise.
With a bit of analysis, it is easy to compare the new tax rates with those from the early '80's where rates were at 60%, but thankfully we're not at the 98% rate from the 1970's just yet. In the current financial climate, the Government is naturally keen to fill its coffers, and by our reckoning the new tax and national insurance rates, coupled with the changes to pension tax relief, will empty almost £13.24 Billion from the pockets of the UK's top 2% of earners by 2013. That's a lot of dosh!
The new rules will start to bite from April 2010. But what are they? See how these float your boat...
- Earners will start paying tax at 50% on that part of their income which exceeds £150,000 per year
- Personal tax allowances will be restricted by £1 for every £2 of income which exceeds £100,000 per year. This means that once income reaches about £113,000 (using today's rates) then there will be no personal tax allowance available at all
- Higher rate tax relief on personal pension contributions will slide away where income exceeds £150,000 per year (this rule applies with effect from April 2011), such that no higher rate relief will apply where income exceeds £180,000 per year
- Because of the peculiar way the system will work, the effective tax rate will actually reach 60% for those unlucky enough to find themselves in the worst income bracket
So, how can those poor souls protect themselves from the ugly clutches of the 50% (or even 60%) tax man? Well, there's plenty of ideas, but the basic premise is to try to ensure that income falls below £100,000 per year. Here's a few thoughts...
- Try to structure 'income' as 'capital gains' - this will most likely apply to employees who participate in company share schemes. Capital gains will not attract the Super-Tax rate, and indeed can be as low as 10%
- Try to 'split' income between spouses - for instance, ensure that income (such as investment income - dividends, bank interest, etc.) is equalised between spouses such that neither sneaks into the Super-Tax league. This can also apply to family companies by, maybe, ensuring that shares are held equally between spouses (but, be warned, tax avoidance rules are prevalent here, so take advice!)
- Ensure that trading losses are claimed as beneficially as possible - this will most likely apply to business owners
- Try to 'trigger' income arising before the new rules hit, for instance employees participating in short-term share schemes might want to exercise their options before 6 April 2010. Ok, ok, it will bring forward any tax payable by a year, but it could significantly reduce the amount of tax to pay
- Try to make full use of tax reliefs whilst they still apply, for instance Gift Aid relief and Personal Pension relief
So, that's The Smart Frog's civil duty done for today. Ensure you message him for specific advice before you take action, otherwise Super-Duper could become Super-Pooper!
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