Despite pressure from business leaders and from within his own party, David Cameron is to abandon plans to scrap the 50p rate of income tax.
- Steve Worth of Worth Accountants
But it should only be a temporary measure warns Parkstone-based accountant Steve Worth.
“The HMRC report on the proceeds raised by the 50p rate is due on January 31 and is expected to show an increase in revenues of hundreds of millions of pounds in the first year,” says Steve.
“That is completely at odds with the Prime Minister’s previous assertion that the higher rate’s economic benefits are limited. However those revenues will almost certainly decline over time as higher rate taxpayers discover ways to circumvent the levy.” The higher rate was introduced in 2010 as a temporary measure by Gordon Brown and is payable on earnings above £150,000. With the HMRC report imminent David Cameron and Chancellor George Osborne have concluded their aim of abolishing the levy is politically impossible if they want to avoid accusations of pandering to the wealthy. Steve Worth has also reminded taxpayers that changes are not just limited to the top earners.
Since April last year, 750,000 people have been paying income tax at 40p on taxable pay over £35,001 – the equivalent of a £42,476 salary. That’s because although the personal tax-free allowance increased to £7,475, to avoid higher income households benefiting, the taxable income threshold for higher rate tax was lowered at the same time. More people will be paying 40% income tax over the next three years as the threshold has been frozen, and people are likely to receive pay rises, however modest.
But Steve has identified some ways to stay below the threshold and remain in the 20p band.
: Use your ISA allowance: “Interest on savings and dividends will contribute to your overall income and could push you into the higher rate tax band. Any savings you hold in an ISA are protected from tax so it makes sense to use your full £10,680.”
: Transfer assets: “If you’re in the 40p tax band, but your spouse only pays basic rate (or no tax at all), consider transferring joint assets like savings and investments into their name to ensure you get as much benefit as possible from the interest.”
: Top up your pension: “If you pay into a scheme set up with your employer it’s likely contributions will be deducted from your salary before tax so by increasing your pension contributions you can reduce earnings liable for tax at the 40p rate. Self-employed and business owners should also consider using pension contributions to mitigate their tax liability.”
To find out about other ways to save tax and keep more of you hard earned profits contact
Steve at Worth Accountants on 01202 516888
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