Accountants fear higher earners will come under a renewed attack when Alistair Darling delivers what is likely to be his last pre-budget report in the coming weeks. They are betting he will reduce the starting point for the new 50% tax from £150,000 to £100,000 and clamp down on people becoming self employed or taking their pay in shares to beat the new rate.
Enterprise investment schemes
Enterprise Investment Schemes invest in firms typically involved in a particular sector or project, and give tax relief of 20% on up to £500,000 a year, if held for three years. Gains are tax-free — but not income — and investments fall outside your estate for inheritance tax purposes after two years. EISs also allow you to defer CGT incurred in the previous three years or the subsequent 12 months — attractive if you paid at the old rate of 40% (in force until April 6, 2008). While you still have to pay CGT on EIS shares bought with tax-deferred funds, you could save 22% on past gains.
Boost your pension
Making the maximum pension fund contribution that qualifies for tax relief will reduce your overall tax bill. You can pay in 100% of earnings, up to a maximum of £235,000 a year, though in the year before retirement there is no limit. However, if you earn more than £150,000, you cannot contribute more than your “normal” pattern, or £20,000, whichever is the higher.
Investment Bonds
Investment bonds are taxed internally at the 20% basic rate. However, up to 5% a year of the original investment (a minimum of £5,000, but no maximum) can be withdrawn for 20 years without any immediate tax liability.
And you can “roll up”, taking 3% income in one year and 7% the next. If you become a basic-rate or non-taxpayer when the bond matures, there is no further tax to pay.
