10 ways to cut your income tax bill

Wednesday, June 22, 2011 | Posted by: Mike Hyland
Categories: Protecting your wealth | Tags: tax, tax planning, income tax, income, reduce, Mike Hyland, minimise, strategies, savings

The top rate of income tax of 50% is the highest since 1988. Coupled with the 1% hike in National Insurance rates from 6 April 2011, the bleak picture for higher earners is that what ends up in their wallet or purse can be significantly less than half of what they earn. Here are 10 suggestions for how to avoid paying too much tax.

Six months ago, Sue Knight suggested a number of ways to reduce your tax burden. But there are several further options that many people could and should consider.

1. Contribute to a pension
Tax relief is available at rates of up to 50% (including relief within the pension fund) for contributions to a pension of up to £50,000 per tax year – or more if you have unused relief carried forward. And don’t forget, income and gains within your pension fund are tax-free.

2. Give to charity
Giving cash to charity under the Gift Aid scheme provides relief from tax at your marginal rate, providing a tax refund of 37.5% of the net donation to a 50% taxpayer. Relief is also available for gifts of land or quoted shares to charity and for donations deducted from your salary through your employer’s payroll.

3. Use your ISA allowances
While ISAs may not be the most fashionable tax-planning suggestion, they do allow you, over a period of time, to build up a significant tax-free fund.

4. Use share-based remuneration
There are several HMRC-approved schemes that allow employers to grant share options to employees, where all of the growth in value in the shares from the date the option is granted falls within the capital gains tax regime (ie, is taxed at a maximum of 28%), rather than being taxed as income at up to 50%. There are also flexible unapproved schemes that can achieve similar results.

5. Make tax-efficient investments
Investments made under the Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) investments now both attract income tax relief at 30%. Following EIS and VCT changes announced in the recent Budget, it will be possible for taxpayers to make income tax savings of up to £360,000 each year from these investments from April 2012.

6. Claim your losses
You can elect to offset capital losses on certain investments – broadly, unquoted trading company shares that you have subscribed for, such as EIS shares, against your income, leading to a potential 50% tax saving on the amount of the loss.

7. Incorporate your business
With corporation tax rates reduced to a maximum 26% in the recent Budget, owner-managers may wish to consider incorporation in order to defer tax on their profits at corporation tax rates, rather than suffer 50% tax on this income as it arises. It may then be possible to extract the accumulated profits from the company at capital gains tax rates in due course.

8. Take loans from your company
It is possible to defer tax on cash taken from your company by taking this in the form of a loan. The company may suffer a 25% tax charge, but this is repayable when the loan is repaid or written off. You will be taxed on the benefit of the ‘cheap’ loan, but with current interest rates so low, the annual tax charge on the loan will be a maximum of 2%. The loan can then be repaid in due course or written off when income tax rates have decreased.

9. Don’t pay tax on your foreign income
Non-UK domiciled individuals can choose not to pay tax on their foreign income unless it is brought to the UK. This can lead to huge tax savings if you have significant offshore assets, although after becoming a long-term UK resident (broadly when you have been here for seven years), you will have to pay between £30,000-£50,000 per annum to access this favourable tax treatment.

10. Leave the country
Non-UK resident individuals are generally not subject to UK tax, except to the extent that their income arises in the UK. However, it may not be that easy to establish your non-UK residence. HMRC is currently consulting on the rules relating to residence and domicile, and we will keep you up to date with any changes announced.

Image: © Images of Money / Tax Codes

To find out how Grant Thornton can assist with your personal financial matters, please visit our Private Client Services page or contact Eric Williams, National Head of Private Client on +44 (0)121 232 5171 or email eric.williams@uk.gt.com

You might also find these posts useful:

* How an HMRC letter about £3,000 of income turned into a £275,000 tax bill
* Income tax strategies for high earners and entrepreneurs (December 2010)
* Our guide to the 2011 new tax year (it’s bad news for HNWIs)